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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
X TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from
October 1, 1996 to December 31, 1996
(Commission File Number 1-11965)
ICG COMMUNICATIONS, INC.
(Commission File Number 1-11052)
ICG HOLDINGS (CANADA), INC.
(Commission File Number 33-96540)
ICG HOLDINGS, INC.
(Exact name of Registrants as Specified in their Charters)
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Delaware 84-1342022
Canada Not Applicable
Colorado 84-1158866
(State or other jurisdiction (I.R.S. employer
of incorporation) identification number)
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9605 East Maroon Circle Not applicable
Englewood, Colorado 80112
1710-1177 West Hastings Street c/o ICG Communications, Inc.
Vancouver, BC V6E 2L3 9605 East Maroon Circle
P.O. Box 6742
Englewood, Colorado 80155-6742
9605 East Maroon Circle Not applicable
Englewood, Colorado 80112
(Address of principal executive (Address of U.S.agent for service)
offices)
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Registrants' telephone numbers, including area codes: (800) 650-5960 or
(303) 572-5960
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class Name of Exchange on Which Registered
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Common Stock, $.01 par value American Stock Exchange
(31,299,392 shares outstanding
on February 18, 1997)
Class A Common Shares, no par value Vancouver Stock Exchange
(31,795,270 shares outstanding on
February 18, 1997)
Not Applicable Not Applicable
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Securities registered pursuant to Section 12(g) of the Act:
- --------------------------------------------------------------------------------
Title of Each Class
- --------------------------------------------------------------------------------
Not Applicable
Not Applicable
Not Applicable
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Indicate by check mark whether the Registrants: (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrants' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
On February 18, 1997, the aggregate market value of ICG Communications, Inc.
Common Stock held by non-affiliates (using the $14.75 American Stock Exchange
closing price on February 18, 1997) was approximately $461,666,032.
On February 18, 1997, the aggregate market value of ICG Holdings (Canada), Inc.
Class A Common Shares held by non-affiliates (using the US$21.32 Vancouver Stock
Exchange closing price on November 6, 1996, the last day on which a sale was
reported) was approximately $14,005,001.
ICG Holdings (Canada), Inc. owns all of the issued and outstanding shares of
Common Stock of ICG Holdings, Inc.
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TABLE OF CONTENTS
PART I . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . 5
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . 5
Overview . . . . . . . . . . . . . . . . . . . . . . . 5
Telecom Services . . . . . . . . . . . . . . . . . . . 6
Strategy . . . . . . . . . . . . . . . . . . . 6
Telecom Services Networks . . . . . . . . . . . 7
Recent Developments . . . . . . . . . . . . . . 8
Services . . . . . . . . . . . . . . . . . . . . 10
Industry . . . . . . . . . . . . . . . . . . . . 12
Network Services . . . . . . . . . . . . . . . . . . . 13
Satellite Services . . . . . . . . . . . . . . . . . . 13
Customers And Marketing . . . . . . . . . . . . . . . 14
Competition . . . . . . . . . . . . . . . . . . . . . . 15
Regulation . . . . . . . . . . . . . . . . . . . . . . 17
Employees . . . . . . . . . . . . . . . . . . . . . . . 20
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . 21
ITEM 3. LEGAL AND ADMINISTRATIVE PROCEEDINGS . . . . . . . . . 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . 21
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . 22
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . 45
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES . . . . . . . . . 45
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT . . . . 46
Executive Officers of ICG . . . . . . . . . . . . . . . 47
Directors of ICG . . . . . . . . . . . . . . . . . . . 48
Directors and Executive Officers of Holdings-Canada
and Holdings . . . . . . . . . . . . . . . . . . . . . 49
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . 51
Director Compensation . . . . . . . . . . . . . . . . 51
Compensation Committee Interlocks and Insider
Participation . . . . . . . . . . . . . . . . . . . . . 51
Executive Compensation . . . . . . . . . . . . . . . . 51
Summary Compensation Table . . . . . . . . . . . 52
Aggregated Option Exercises in Last Fiscal
Year End Option Values . . . . . . . . . . . . . . 53
Option/SAR Grants in Last Fiscal Year . . . . . . 53
Executive Employment Contracts . . . . . . . . . . . . 53
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . 55
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . 58
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORT ON
FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . 60
Financial Statements . . . . . . . . . . . . . . . . . . 60
Report on Form 8-K . . . . . . . . . . . . . . . . . . 68
Exhibits . . . . . . . . . . . . . . . . . . . . . . . 68
Financial Statement Schedule . . . . . . . . . . . . . . 68
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . F-1
FINANCIAL STATEMENT SCHEDULE . . . . . . . . . . . . . . . . . . . . . S-1
4
PART I
Unless the context otherwise requires, the term "Company" or "ICG"
means the combined business operations of ICG Communications, Inc. ("ICG") and
its subsidiaries, including ICG Holdings (Canada), Inc. ("Holdings-Canada") and
ICG Holdings, Inc. ("Holdings"); the terms "fiscal" and "fiscal year" refer to
ICG's fiscal year ending September 30; and all dollar amounts are in U.S.
dollars. The Company has elected to change its fiscal year end to December 31
from September 30, effective January 1, 1997. Industry figures were obtained
from reports published by the Federal Communications Commission ("FCC"), the
U.S. Department of Commerce, Connecticut Research (an industry research
organization) and other industry sources, which the Company has not
independently verified.
ITEM 1. BUSINESS
Overview
The Company is one of the largest providers of competitive local
telephone services in the United States, based on estimates of the industry's
1996 revenue. Competitive local exchange carriers ("CLECs"), formerly known as
CAPs (competitive access providers), seek to provide an alternative to the
incumbent local exchange carriers ("ILECs") for a full range of
telecommunications services in the newly opened regulatory environment. As a
CLEC, the Company operates networks in three regional clusters covering major
metropolitan statistical areas in California, Colorado, and the Ohio Valley, and
in three markets in the Southeast. The Company is expanding its geographic focus
to include Texas and Oklahoma (and may also expand to Arkansas and Louisiana)
through its recently announced joint venture with Central and South West
Corporation ("CSW") that will develop and market telecommunications services,
including local exchange telephone service, in these markets. The Company also
provides a wide range of network systems integration services and maritime and
international satellite transmission services. As a leading participant in the
rapidly growing competitive local telecommunications industry, the Company has
experienced significant growth, with total revenue increasing from $29.5 million
for fiscal 1993 to $190.7 million for the 12-month period ended December 31,
1996.
In August 1996, IntelCom Group Inc. ("IntelCom"), a Canadian federal
corporation, received final approval for its reincorporation into the United
States, pursuant to which its shareholders exchanged approximately 98 percent of
their common shares on a one-for-one basis for shares of Common Stock of ICG, a
Delaware corporation. IntelCom then changed its name to ICG Holdings (Canada),
Inc., and its wholly owned subsidiary, IntelCom Group (U.S.A.), Inc., a Colorado
corporation, changed its name to ICG Holdings, Inc. Shareholders who elected to
continue to hold common shares of Holdings-Canada ("Class A Common Shares") are
entitled to exchange such shares at any time into ICG Common Stock. The
reincorporation was designed to maintain the Company's results of operations,
existing net operating losses and asset values of the Company without causing
any material United States or Canadian federal income tax consequences to the
Company.
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The Federal Telecommunications Act of 1996 (the "Telecommunications
Act") and several pro-competitive state regulatory initiatives have
substantially changed the telecommunications regulatory environment in the
United States. Due to these regulatory changes, the Company is now permitted to
offer all interstate and intrastate telephone services, including local dial
tone, and is developing a full set of complementary services, such as long
distance and data transmission services. The Company began offering competitive
local dial tone services in Orange County, California in September 1996, and
intends to begin offering local dial tone services in most of its markets during
the first half of 1997. The Company has 14 high capacity digital telephony
switches (and one additional switch located in Phoenix which will be operational
through April 1997, after which it will be relocated) and 10 data communications
switches in operation to support its services, and plans to install additional
telephony and data switches as demand warrants. To facilitate the expansion of
its services, the Company has entered into agreements with Lucent Technologies,
Inc. ("Lucent") and Northern Telecom, Inc. ("Nortel"), and has reached a
non-binding agreement in principle with Cascade Communications, Inc.
("Cascade"), to purchase a full range of switching systems, fiber optic cable,
network electronics, software and services. See "-Telecom Services-Recent
Developments."
Telecom Services
The Company operates networks in the following markets within its three
regional clusters: California (Sacramento, San Diego and the Los Angeles and San
Francisco metropolitan areas); Colorado (Denver, Colorado Springs and Boulder);
and the Ohio Valley (Akron, Cincinnati, Cleveland, Columbus, Dayton and
Louisville). The Company also operates networks in Birmingham, Charlotte and
Nashville. The Company will continue to expand its network through construction,
leased facilities and strategic joint ventures, such as the recently announced
joint venture with CSW that will initially serve Austin and Corpus Christi,
Texas and Tulsa, Oklahoma with local telephone, long distance and data
transmission services. The joint venture may also develop business opportunities
in other cities in Texas, Oklahoma, Arkansas and Louisiana. The Company's
operating networks have grown from approximately 168 fiber route miles at the
end of fiscal 1993 to approximately 2,385 fiber route miles as of December 31,
1996. Telecom Services revenue has increased from $4.8 million for fiscal 1993
to $109.0 million for the 12-month period ended December 31, 1996.
Strategy
The Company's objective is to become the dominant alternative to the
ILEC in the markets it serves. In furtherance of this objective, the Company has
developed strategies to leverage its extensive network footprint, its
considerable expertise in the provision of switched telecommunications services,
and its established customer base of long distance carriers. In addition, the
Company has begun to aggressively market its broad range of telecommunications
services to business end users. Key elements of this strategy are:
Expand Service Offerings. The Company's focus is to provide a wide
range of local, long distance and data communications services to business and
carrier customers within the Company's service areas, with an emphasis on local
dial tone services. The Company believes that customers are increasingly
demanding a broad, full service approach to providing
6
telecommunications services. By offering a wide array of services, management
believes the Company will be able to capture high volume business accounts. To
this end, the Company plans to complement its core competitive local exchange
services with competitive local toll, long distance and data communications
services tailored to the needs of its customers.
Market Services to End Users and Carriers. The Company has historically
marketed its services primarily to long distance carriers and resellers and its
"first to market" advantage has enabled it to establish relationships with such
carriers and resellers. As competition in the provision of local telephone
services increases, these carriers and resellers are attempting to expand their
service offerings by developing and delivering local telephone services and new
enhanced products and services, which the Company is able to provide its carrier
customers for resale. In addition, the Company is expanding its sales and
marketing efforts to include end user business customers. Management believes a
targeted end user strategy can accelerate its penetration of the local services
market and better leverage the Company's network investment. In support of this
entrance into the end user market, the Company is substantially expanding its
distribution channels through a significant increase in its direct sales force
and marketing personnel.
Concentrate Markets in Regional Clusters. The Company believes that by
focusing on regional clusters it will be able to more effectively service its
customers' needs and efficiently market, operate and control its networks. As a
result, the Company has concentrated its networks in regional clusters serving
major metropolitan areas in California, Colorado and the Ohio Valley. The
Company also operates networks in the Southeast in Birmingham, Charlotte and
Nashville. The Company is currently expanding its network footprint to include
Texas and Oklahoma (and may also expand to Arkansas and Louisiana) in
partnership with CSW.
Expand Alliances with Utilities. The Company has established and is
actively pursuing strategic alliances with utility companies to take advantage
of their existing fiber optic infrastructures and customer relationships. This
approach affords the Company the opportunity to license or lease fiber optic
facilities on a long-term basis in a more timely, cost effective manner than by
constructing facilities. In addition, utilities possess conduit and other
facilities that enable the Company to more easily install additional fiber to
extend existing networks in a given market. Finally, management expects these
strategic alliances to combine the Company's expertise in providing high quality
telecommunications services with the utility's name recognition and customer
relationships in marketing telecommunications products and services to the
utility's customer base.
Telecom Services Networks
The Company's networks are composed of fiber optic cables, switching
facilities, advanced electronics, transmission equipment and related wiring and
equipment. The Company typically designs a ring architecture with a view toward
making the network accessible to the largest concentration of telecommunication
intensive businesses in a given market.
The Company's networks are configured in redundant synchronous optical
network ("SONET") rings that offer the advantage of uninterrupted service in the
event of a fiber cut or
7
equipment failure, resulting in limited outages and increased network
reliability. The Company generally markets its services at prices below those
charged by the ILEC. Management believes these factors combine to create a more
reliable and cost effective alternative to copper-based networks which are still
used, to some extent, by ILECs.
The Company's networks are constructed to access long distance carriers
as well as areas of significant end user telecommunications traffic in a cost
efficient manner. The construction period of a new network varies depending upon
the scope of the activities, such as the number of backbone route miles to be
installed, the initial number of buildings targeted for connection to the
network backbone and the general deployment of the network infrastructure.
Construction is planned to allow revenue-generating operations to commence prior
to the completion of the entire network backbone. When constructing and relying
principally on its own facilities, the Company has experienced a period of 12 to
18 months from initial design of a network to revenue generation for such
network. Based upon its experience of using ILEC facilities to provide initial
customer service and the Company's new agreements to use utilities' existing
fiber, the Company has experienced revenue generation within nine months after
commencing network design. After installing the initial network backbone,
extensions to additional buildings and expansions to other regions of a
metropolitan area are evaluated, based on detailed assessments of market
potential. The Company is currently expanding all of its existing networks to
reduce its reliance on the ILECs and evaluating development of new networks both
inside and outside its existing regional clusters.
The Company's network monitoring center in Denver operates and manages
all of the Company's networks from one central location. Centralized electronic
monitoring and control of the Company's networks allows the Company to avoid
duplication of this function in each city, thereby reducing costs. The
monitoring capabilities are supplemented through a contract with a Lucent switch
control center in Phoenix for surveillance of substantially all of the Company's
central office switches.
Switched services involve the transmission of voice or data to long
distance carrier-specified or end user-specified termination sites. By contrast,
the special access services provided by the Company and other CLECs involve a
fixed communications link or "pipe," usually between a specific end user and a
specific long distance carrier's point of presence ("POP"). With a switch and
interconnection to various carriers' networks, it is possible for the Company to
direct a long distance carrier's traffic to any end user regardless of whether
the end user is connected to the Company's owned or leased network. In addition,
a switch gives the Company the technological capability to provide the full
range of local telephone services. The Company began offering local telephone
services to business customers in the Orange County, California area in
September 1996. The Company anticipates extending such services over the next 12
months to the remainder of its existing markets. See "-Regulation-State
Regulation."
Recent Developments
CSW Agreement. In January 1997, the Company announced a joint venture
with CSW which will develop and market telecommunications services in Texas and
Oklahoma (and may also expand to Arkansas and Louisiana). The new company will
be based in Austin, Texas and will
8
initially serve Austin and Corpus Christi, Texas and Tulsa, Oklahoma with local
telephone, long distance and data transmission services. ChoiceCom also expects
to develop business opportunities in other cities in Texas, Oklahoma, Arkansas
and Louisiana.
Lucent Agreement. In September 1996, the Company entered into an
equipment purchase agreement with Lucent for advanced telecommunications
products and services. Lucent will provide the Company with a full range of
systems, software and services which will be used by the Company to build and
expand the Company's advanced communications networks, including 5ESS(R)-2000
switching systems, SONET equipment, access equipment, power plants, application
software systems, Advanced Intelligence Network ("AIN") platforms, data
networking products and fiber optic cable. Lucent has also agreed to provide
engineering, installation, onsite technical support and other professional
services. Under the agreement, if the Company does not meet a minimum purchase
level in any given year, Lucent may discontinue certain discounts, allowances
and incentives otherwise provided to the Company for the year in which the
minimum level was not met. In addition, the agreement may be terminated by
either the Company or Lucent upon sixty days prior written notice.
Cascade Agreement. The Company has reached a non-binding agreement in
principle with Cascade for the purchase of data switching components that will
enable the Company to provide high-speed data connectivity to its customers. The
Company expects to execute the agreement shortly. The agreement also provides
for purchase of high-speed frame relay and asynchronous transfer mode ("ATM")
switching products. In addition, the Company will utilize turnkey services from
Cascade for product planning and deployment, including program management,
network design, onsite operations support and training. The Company began
offering its data communications services in selected California markets in
December 1996 and plans to deploy similar networks in its Colorado and Ohio
markets in the first half of 1997.
Nortel Agreement. In December 1996, the Company entered into an
equipment and software licensing agreement with Nortel under which Nortel will
provide the Company with telecommunications equipment and software.
Network Expansion. The Company continues to expand its network footprint
through several strategic initiatives with utility companies and others. These
include a 30-year agreement and two indefeasible rights of use ("IRU")
agreements with the Los Angeles Department of Water and Power ("LADWP") for 105
miles of fiber optic capacity in Los Angeles, including Century City, West Los
Angeles, Mid-Wilshire and Sherman Oaks; a 15-year agreement with the City of
Burbank, California to lease fiber optic capacity on an 11.5 mile network; and a
ten-year agreement, with a five-year renewal, and three ten-year IRU agreements
with the City of Alameda Bureau of Electricity ("Alameda"), each with five-year
renewals, under which the Company will have access to approximately seven miles
of fiber optic cable.
Interconnection Agreements. The Company has executed interconnection
agreements with Pacific Bell in California, Ameritech Corp. ("Ameritech") in
Ohio and SBC Communications, Inc. ("SBC") in Oklahoma and Texas, and interim
agreements have been signed with GTE in California and in Alabama, Florida,
Indiana, Kentucky, North Carolina, Ohio, Oklahoma, and Texas. An interconnection
agreement also has been signed with BellSouth which
9
covers Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, North
Carolina and Tennessee. The Company's interconnection agreement with Ameritech
allows for the agreement to be expanded without further negotiations to include
Ameritech's properties in Illinois, Indiana, Michigan and Wisconsin. The
Company's interconnection agreement with SBC allows for the agreement to be
expanded without further negotiations to include SBC's properties in Arkansas,
Kansas and Missouri. The Company also has negotiated with Cincinnati Bell
Telephone Company, but has been unable to reach an agreement to date. On January
28, 1997, the Company filed arbitration petitions with the relevant public
utility commissions in Indiana, Kentucky and Ohio. After participating in an
arbitration hearing before the Colorado Public Utilities Commission (Colorado
"PUC"), the Company executed an agreement with U S WEST Communications, Inc. ("U
S WEST") on December 17, 1996, which agreement was approved by the Colorado PUC
on January 15, 1997. U S WEST has filed an appeal of the PUC's approval of the
arbitrated agreement with the Federal District Court in Denver, Colorado.
Certain of the Company's interconnection agreements do not contain "most favored
nation" pricing clauses. The Company believes it is entitled to "most favored
nation" pricing provisions under federal law, but this issue is being litigated.
If this litigation is finally judicially resolved adversely to the Company's
position, the Company will be subject to the risk that other CLECs may obtain
more favorable pricing terms from ILECs.
Services
The Company's competitive local exchange services include private line,
special access, interstate and intrastate switched access services, local dial
tone, long distance and data services. Private line services are generally used
to connect the separate locations of a single business. Special access services
are generally used to connect end user customers to a long distance telephone
carrier's facilities, to connect long distance carrier's facilities to the local
telephone company's central offices, and to connect different facilities of the
same long distance carrier or facilities of different long distance carriers. As
part of its initial "carrier's carrier" strategy, the Company targeted the
transport between long distance company facilities and the local telephone
company central offices, and, for high volume customers, between the long
distance company and the end user customer's office. The Company has begun to
market its services directly to end user business customers.
The Company's interstate and intrastate switched access services
include the transport and switching of calls between the long distance carrier's
facilities and either the local telephone company central offices or end users.
By performing the switching services, the Company can reduce the long distance
carriers' local access costs, which constitute their major operating expense. As
the Company provides a greater portion of the local segment of a call over its
own facilities, the Company expects to experience improved margins on what has
initially been a negative or low margin revenue stream.
Competitive local dial tone services consist of basic local exchange
lines and trunks for business, related line features (such as voice mail, Direct
Inward Dialing (DID), hunting and custom calling features), local calling, and
intraLATA, also called local toll, calling. The Company plans make these
services available in second quarter of 1997. The Company believes that having a
full complement of communications services, including local and long distance
10
services, will strengthen its overall market position and help the Company to
better penetrate the local exchange marketplace. The Company is also developing
long distance services, including calling and debit cards, to complement its
local exchange services family of products.
The Company expects to begin offering long distance services in the
first half of 1997. The target customers for such services are the Company's
existing and end user customers. The Company's existing switches will facilitate
its entry into this business and reduce its cost of obtaining long distance
transmission capacity. However, the Company will rely on other carriers to
provide transmission and termination services. Therefore, the Company expects to
enter into resale agreements, which typically provide for resale on a per minute
basis, with long distance carriers to fulfill such needs. To reduce its cost of
services, the Company may lease point-to-point circuits on a monthly or longer
term fixed cost basis where it anticipates high traffic volume.
In order to expand into providing long distance services, the Company
has begun to select new equipment and software and integrate these into its
networks, hire and train qualified personnel, enhance its billing, back-office
and information systems to accommodate long distance services and the acceptance
of potential customers. The Company expects to generate low or negative gross
margins and substantial start-up expenses as it rolls out its long distance
service offerings. The Company does not expect long distance services to
generate a material portion of its revenues over the near term.
The Company expects to begin offering data transmission services, which
include frame relay and ATM, in most of its markets in 1997, and has already
been doing so in California since December 1996. The Company has initially
targeted Internet Service Providers ("ISPs") with its frame relay services in
the belief that these firms require increasing amounts of local frame relay to
connect businesses to ISP's services. The Company also intends to offer its data
transmission services to its existing and potential customers, which have
substantial data communications requirements. In providing these services, the
Company will be dependent upon vendors for assistance in the planning and
deployment of its initial data product offerings, as well as ongoing training
and support. Additionally, the Company must select new equipment and software
and integrate these into its networks, hire and train qualified personnel,
enhance its billing, back-office and information systems to accommodate data
transmission services and customer acceptance of such services. The Company does
not expect its data transmission business to generate a material portion of its
revenues over the near term and as a new entrant in the business, expects to
generate low or negative gross margins and substantial start-up costs.
The Company's Signaling System 7 ("SS7") services provide signaling
connections between long distance and local exchange carriers, and between long
distance carriers' networks. SS7, known as look-ahead routing, is used by local
exchange companies, long distance carriers, wireless carriers and others to
signal between network elements, creating faster call set-up, resulting in a
more efficient use of network resources. SS7 is now the standard method for
telecommunications signaling worldwide. The Company has deployed signal transfer
points ("STPs") throughout its networks to efficiently route SS7 data across the
United States. SS7 is also the enabling technology for AIN platforms, a set of
services and signaling options that carriers can use to create new services or
customer options. Carriers purchase connections into the
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Company's SS7 network, and also purchase connections to other carriers (local
and long distance) on a monthly recurring basis.
In August 1996, the Company acquired the SS7 business of Pace Network
Services, Inc., a division of Pace Alternative Communications, Inc. The Company
has also developed a nationwide SS7 service with Southern New England Telephone
("SNET"), one of the nation's ten largest local exchange carriers. The Company
believes that, together with SNET, it is one of the largest independent
suppliers of SS7 services. The Company's STPs are integrated with two SNET
"gateway" STPs in Connecticut.
Zycom. The Company owns a 70% interest in Zycom Corporation ("Zycom")
which operates an 800/900 number service bureau and a switch platform in the
United States supplying information providers and commercial accounts with
audiotext and customer support services.
Industry
The Company operates primarily in the local telephone service market as
a CLEC. The Company also plans to compete in the long distance market, and in
the frame relay and ATM data communications markets, to provide "full service"
to its end user and carrier customers. The Company believes it can maximize
revenue and profit opportunities by leveraging its extensive network facilities
in providing multiple communications services to its customers.
Local telephone service competition was made possible by the
Telecommunications Act and by regulatory initiatives at the state level. Prior
to passage of the Telecommunications Act, firms like the Company were generally
confined to providing special access services. These firms, including the
Company, installed fiber optic cable connecting long distance telephone
carriers' POPs within a metropolitan area and, in some cases, connecting end
users (primarily large businesses and government entities) with long distance
carrier POPs. The greater capacity and economies of scale inherent in fiber
optic cable enabled the CAPs to offer customers less expensive and higher
quality special access and private line services than the ILECs.
Signals carried over digital fiber optic networks are superior in many
respects to older analog signals carried over copper wire, which continue to be
used in varying degrees by the ILECs. In addition to offering faster and more
accurate transmission of voice and data communications, digital fiber optic
networks generally require less maintenance than comparable copper wire
facilities, thereby decreasing operating costs. Furthermore, the transmission
capacity of digital fiber optic cable is determined by the electronic equipment
used on the network. This allows network capacity to be increased with a change
in electronics, not the actual fiber network, as would be the case with a copper
wire architecture. Lastly, digital fiber optic cable is largely immune from
electromagnetic and radio interference, resulting in enhanced transmission
quality.
The Telecommunications Act, subsequent FCC decisions and many state
legislative and regulatory initiatives have substantially changed the
telecommunications regulatory environment in the United States. Due to these
regulatory changes, CLECs are now legally able to offer all communications
services, including local dial tone and all interstate and intrastate switched
services, effectively opening up the local telephone market to full competition.
Because of these
12
changes in state and federal regulations, CLECs have expanded their services
from providing competitive access services such as private line and special
access to providing all local exchange services to become true competitors to
the ILECs. See "-Regulation."
Network Services
Through the Company's wholly owned subsidiary, Fiber Optic
Technologies, Inc. ("FOTI"), the Company supplies information technology
services and selected networking products, focusing on network design,
installation, maintenance and support for a variety of end users, including
Fortune 1000 firms and other large businesses and telecommunications companies.
Revenue from Network Services was $60.4 million for the 12-month period ended
December 31, 1996.
The Company provides network infrastructures, systems and support
services, including the design, engineering and installation of local and wide
area networks ("LANs/WANs") for its customers. These networks (within end user
offices, buildings or campuses) may include fiber optic, twisted-pair, coaxial
and other network technologies. The Company specializes in turnkey network
installations including cabling and electronics that address specific
environments. The Company also provides professional network support services.
These services include network move, add and change services and on-going
maintenance and support services. Network Services revenue is expected to
constitute a smaller portion of the Company's future revenue as Telecom Services
revenue increases.
The Company offers these network integration and support services
through offices located within four regions. The regional headquarters are
located in Dallas, Denver, Portland (Oregon) and San Francisco.
Satellite Services
The Company's Satellite Services operations provide satellite voice and
data transmission services to major cruise lines, commercial shipping vessels,
yachts, the U.S. Navy and offshore oil platforms. The Company also owns a
teleport facility which provides international voice and data transmission
services. Revenue for the Satellite Services operations (adjusted to reflect the
sale of certain teleport assets) was $11.4 million for fiscal 1995 and $21.3
million for the 12-month period ended December 31, 1996.
MTN. In January 1995, the Company and an unaffiliated entity formed
Maritime Telecommunications Network, Inc. ("MTN") which purchased the assets of
a business providing digital wireless communications through satellites to the
maritime cruise industry, U.S. Navy vessels and offshore oil platforms utilizing
an experimental radio frequency license and a grant of Special Temporary
Authority ("STA") issued by the FCC. MTN provides private communications
networks to various cruise lines allowing passengers to make calls from their
cabins to anywhere in the world. MTN additionally provides its communications
services to the U.S. Navy in conjunction with a major long distance provider,
which serves as the long distance carrier, while MTN provides the communications
equipment and network. The Company believes that the radio frequencies employed
under its experimental license enable it to provide a higher quality maritime
13
service than is available through the radio frequencies currently allocated to
other maritime service providers.
In April 1996, the FCC issued a waiver allowing MTN to apply for a
permanent FCC license to utilize the same frequencies as are being used under
the experimental license. The Company's application is pending. Additionally, in
January 1997, the FCC granted an STA which enables MTN to conduct operations as
proposed in the pending application for a permanent license, for up to an
initial six-month period while the FCC's review of the permanent license
applications is pending. Although the Company expects that the FCC will issue a
permanent license, there can be no assurance that the Company will be granted a
permanent license, that the experimental license currently being used will be
renewed for a future term or that any license granted by the FCC will not
require substantial payments from the Company. See "-Regulation."
MCN. In March 1996, the Company acquired a 90% equity interest in
Maritime Cellular Tele-Network, Inc. ("MCN"), a Florida-based provider of
cellular and satellite communications for commercial ships, private vessels and
land-based mobile units. This acquisition expands the Company's business from
C-band satellite services for cruise ships and naval vessels to cover land-based
units and smaller ships.
Nova-Net. In May 1994, the Company acquired Nova-Net Communications,
Inc. ("Nova-Net"), which provides private data networks utilizing VSATs and
specializes in data collection and in monitoring and control of customer
production and transmission facilities in various industries, including oil and
gas, electric and water utilities and environmental monitoring industries.
Nova-Net designs, builds and manages private data networks that enable a variety
of companies to transmit critical sensor and flow readings to key monitoring
points from multiple locations. Nova-Net manages networks 24 hours a day, seven
days a week through its network control center in Englewood, Colorado.
Teleport. The teleport in Holmdel, New Jersey, acquired as part of the
Company's acquisition of MTN, is located 20 miles south of Newark and
specializes in international digital voice and data communications services with
full fiber interconnection to the local telephone company facilities in New York
City. Teleport services are also provided to the maritime industry, including
support of the Company's cruise ship, U.S. Navy and offshore oil platform
telephone and data services business. In addition, the Company markets the
resale of services from the four teleports it sold in the first quarter of 1996.
Customers And Marketing
The Company's primary marketing strategies for Telecom Services are to
offer a broad range of local and long distance communications services,
including data communications, to business customers and the Company's wholesale
(primarily long distance carrier) customers, at cost-effective rates. Wholesale
customers typically re-market the Company's services to the wholesaler's end
user, under the wholesaler's brand name. The Company markets its services in
regional clusters, which it believes is the most effective and efficient way to
penetrate its markets.
14
The Company markets its products through direct sales to end users and
wholesale accounts, and through some direct mail. The Company is launching a
print advertising campaign in the first quarter of 1997 and may intensify direct
mail activities. Telecom Services revenue from major long distance carriers and
resellers constituted approximately 78%, 71% and 69% of the Company's Telecom
Services revenue in fiscal 1995, fiscal 1996 and the three-month period ended
December 31, 1996, respectively. The balance of the Company's Telecom Services
revenue was derived from end users. The Company anticipates revenue from end
users will increase in the future as it continues to expand its local telephone
service offerings and grows its sales and marketing teams to focus on the end
user segment of the market. Telecom service agreements with its customers
typically provide for terms of one to five years, fixed prices and early
termination penalties.
The Company has telecommunications sales offices in: Irvine, Los
Angeles, Oakland, Sacramento and San Diego, California; Denver and Colorado
Springs, Colorado; Cleveland, Columbus and Dayton, Ohio; Birmingham, Alabama;
Louisville, Kentucky; Charlotte, North Carolina; and Nashville, Tennessee. The
Company anticipates opening additional sales offices in California, Ohio, and
Texas in 1997. The Company's marketing staff is located in Denver, Colorado.
The Company markets its network systems integration products and
services through a direct sales force located in the Rocky Mountains, Pacific
Northwest, Texas and California regions. The Company also has entered into
reseller agreements with manufacturers of network integration products and
services.
The Company offers satellite private line transmission services from
its teleport to business customers that can benefit from the Company's
international and domestic transmission capabilities. The Company also markets
voice and data communications to the maritime industry, including cruise ships,
U.S. Navy vessels, commercial vessels, private yachts, offshore oil platforms
and mobile land-based units.
Competition
The Company operates in an increasingly competitive environment
dominated by the ILECs, such as the RBOCs and GTE, which are among the Company's
current competitors. Also included among the Company's current competitors are
independent ILECs, other CLECs, network systems integration services providers,
microwave and satellite service providers, teleport operators, wireless
telecommunications providers and private networks built by large end users.
Potential competitors (using similar or different technologies) include cable
television companies, utilities, local telephone companies outside their current
local service areas, and the local access operations of long distance carriers.
Consolidation of telecommunications companies, including pending mergers between
certain of the RBOCs, and the formation of strategic alliances within the
telecommunications industry, as well as the development of new technologies,
could give rise to increased competition. One of the primary purposes of the
Telecommunications Act is to promote competition, particularly in the local
telephone market. Since enactment of the Telecommunications Act, several
telecommunications companies have indicated their intention to aggressively
expand their ability to address many segments of the telecommunications
industry,
15
including segments in which the Company participates and expects to participate.
For example, AT&T and MCI are entering the local markets, as competitors of the
Company. This may result in more participants than can ultimately be successful
in a given market.
Telecom Services. The bases of competition in competitive local
telecommunications services are generally price, service, reliability,
transmission speed and availability. The Company believes that its expertise in
developing and operating highly reliable, advanced digital networks which offer
substantial transmission capacity at competitive prices enables the Company to
compete effectively against the ILECs and other CLECs.
In every market in which the Company operates telecom service networks,
the ILECs (which are the historical monopoly providers of local telephone
services) are the primary competitors. The ILECs have long-standing
relationships with their customers and provide those customers with various
transmission and switching services. The ILECs also have the potential to
subsidize access and switched services with revenue from a variety of businesses
and historically have benefited from certain state and federal regulations that
have favored the ILECs over the Company. In certain markets where the Company
operates, other CLECs also operate or have announced plans to enter the market.
Some of those CLECs are affiliated with major long distance companies. Current
competitors also include network systems integration services providers,
wireless telecommunications providers and private networks built by large end
users. Additional competition may emerge from cable television operators and
electric utilities. Many of the Company's actual and potential competitors have
greater financial, technical and marketing resources than the Company.
The Company's networks compete most directly with the RBOCs and GTE. In
general, the provision of interstate access services by the RBOCs and GTE,
including the rates charged for such services, is regulated by the FCC, and the
provision of intrastate access and local services, including the rates charged
for such services, is regulated by the individual state regulatory commissions.
See "-Regulation." In the past, FCC policies have constrained the ability of the
RBOCs and GTE to decrease their prices for interstate access services, based on
their status as dominant carriers. Although FCC regulatory approval for price
reductions (beyond certain parameters) still must be obtained, the FCC has
allowed all recently proposed access reductions to become effective and has
granted the RBOCs flexibility in pricing their interstate access services on a
central office by central office basis. This pricing flexibility resulted in
certain RBOCs lowering their prices in high density zones, the probable arena of
competition with the Company. In addition, the FCC has granted waivers of its
access charge pricing rules to the RBOCs to allow them to further reduce certain
access prices. The FCC also commenced a rule making proceeding in December 1996
that proposes to undertake a comprehensive reform of its access charge pricing
rules, and a separate rule making proceeding is considering a reform of the
existing subsidies that promote universal service. Under the Telecommunications
Act, the FCC is required to complete the universal service reform proceeding and
to adopt new rules by May 8, 1997. The FCC's access charge reform proceeding is
likely to eventually result in a reduction in access rates charged by the RBOCs
and GTE. The lowering of access rates and increased pricing flexibility for the
RBOCs and GTE may adversely affect
16
the Company's ability to compete for certain services. If the RBOCs and GTE
continue to lower access rates, there would be downward pressure on certain
special access and switched access rates charged by CLECs, which pressure may
adversely affect the Company's profitability. See "-Regulation." In addition,
the Telecommunications Act and its implementation by the states and the FCC
allows the RBOCs and GTE to provide a broader range of services and likely will
enable the RBOCs and GTE to more effectively compete against long distance
carriers, which are the Company's primary customers for telecom services.
Network Services. The bases of competition in the network services
market are primarily technological capability and experience, value-added
services and price. In this market, the Company competes with a variety of local
and regional system integrators.
Satellite Services. In the delivery of domestic and international
satellite services, the Company competes with other full service teleports in
the northeast region of the United States. The bases of competition are
primarily reliability, price and transmission quality. Most of the Company's
satellite competitors focus on the domestic video market. Competition is
expected principally from a number of domestic and foreign telecommunications
carriers, many of which have substantially greater financial and other resources
than the Company. In the maritime telecommunications market, MTN competes
primarily with COMSAT Corporation ("COMSAT") in providing similar
telecommunications services. COMSAT has FCC licenses that are similar to MTN's,
it owns its own satellites and it is the sole U.S. point of control for access
to Intelsat satellites.
Regulation
The Company's services are subject to significant federal, state and
local regulation. The Company operates in an industry that is undergoing
substantial change as a result of the passage of the Telecommunications Act.
The Telecommunications Act opens the local and long distance markets to
additional competition and changes the division of oversight between federal and
state regulators. Under previous law, state regulators had authority over those
services that originated and terminated within the state ("intrastate") and
federal regulators had jurisdiction over services that originated within one
state and terminated in another state ("interstate"). State and federal
regulators now share responsibility for implementing and enforcing the
provisions of the Telecommunications Act. In exchange for unbundling their
network elements and allowing competitors to interconnect at cost-based rates
and on nondiscriminatory terms and conditions, the RBOCs are now allowed to seek
authority to provide long distance services.
The Telecommunications Act generally requires ILECs to provide
interconnection and nondiscriminatory access to the ILEC networks on more
favorable terms than have been available in the past. However, such new
agreements are subject to negotiations with each ILEC which may involve
considerable delays and may not necessarily be obtained on terms and conditions
that are acceptable to the Company. In such instances, the Company may petition
the proper state regulatory agency to arbitrate disputed issues. Ultimately, the
terms of an arbitrated agreement are subject to review by the FCC or the federal
courts. There can be no assurance that the Company will be able to negotiate
acceptable new interconnection agreements or that, if state regulatory
authorities impose terms and conditions on the parties in arbitration, such
terms will be acceptable to the Company.
17
On August 8, 1996, in two separate decisions in its FCC Docket 96-98,
referred to as the "First Report and Order" and the "Second Report and Order,"
the FCC adopted rules and policies implementing the local competition provisions
of the Telecommunications Act. The FCC, among other things, adopted national
guidelines with respect to the unbundling of ILECs' network elements, resale of
ILEC services, the pricing of interconnection services and unbundled elements,
and other local competition issues.
Both of the Orders adopted by the FCC on August 8, 1996 have been
challenged in federal courts of appeals by the RBOCs, GTE, other independent
ILECs, long distance carriers, and state regulatory commissions. Petitions also
have been filed with the FCC requesting that the FCC reconsider various aspects
of the interconnection rules. The requests for court review of the FCC's First
Report and Order have been consolidated into one proceeding that will be decided
by the U.S. Court of Appeals for the Eighth Circuit in St. Louis, Missouri.
Requests also were filed by certain ILECs and state commissions to stay the
effective date of the FCC's rules adopted in the First Report and Order pending
the issuance by the Court of a decision on the merits. On October 15, 1996, the
Court issued a stay of certain of the FCC's rules adopted in the First Report
and Order, including implementation of the pricing provisions of the FCC's
rules, which define the methodology by which the ILECs must develop prices for
their unbundled elements and provide the basis for the FCC's interim or
"default" and "proxy" price ceilings and ranges. The Court also stayed the FCC's
"most favored nation" rules which implement Section 252(i) of the
Telecommunications Act and require ILECs to make available any interconnection,
service or network element in an approved interconnection agreement to any other
requesting carrier on the same terms and conditions and at the same price,
thereby enabling new entrants to "pick and choose" elements of established
interconnection agreements. Oral argument on the merits of the FCC's rules was
heard on January 17, 1997 and the Court is not expected to render a decision
until March or April 1997. The Court's stay, however, does not affect the FCC's
other interconnection rules as adopted on August 8, 1996, nor does it affect the
statutory requirements of the Telecommunications Act, including the statutory
requirement that ILECs conduct negotiations, enter into interconnection
agreements with competitive carriers, and unbundle their network elements. A
separate appeal of the FCC's Second Report and Order also is pending.
Federal Regulation. The Company generally operates as a regulated
carrier with fewer regulatory obligations than the ILECs. The Company must
comply with the requirements of the Telecommunications Act, such as offering
service on a non-discriminatory basis at just and reasonable rates. The FCC
treats the Company as a non-dominant carrier. The FCC has established different
levels of regulation for dominant and non-dominant carriers. Of domestic common
carriers, only GTE and the RBOCs are classified as dominant carriers for the
provision of access services, and all other providers of domestic common carrier
services are classified as non-dominant. Under the FCC's streamlined regulation
of non-dominant carriers, the Company must file tariffs with the FCC for certain
interstate services on an ongoing basis. The FCC has, however, recently
eliminated the requirement that non-dominant long distance carriers file
tariffs. Based on this proposal and previous FCC decisions, the Company believes
that the FCC also will eliminate tariff filing requirements for non-dominant
local exchange carriers such as the Company. The Company is not subject to price
cap or rate of return regulation, nor is it currently required to obtain FCC
authorization for the installation or operation of its fiber optic network
facilities used
18
for services in the United States. The Company may install and operate non-radio
facilities for the transmission of interstate communications without prior FCC
authorization. The Company's use of digital microwave radio frequencies in
connection with certain of its telecommunications services is subject to FCC
radio frequency licensing regulation. See "Federal Regulation of Microwave and
Satellite Radio Frequencies" below.
State Regulation. In general, state regulatory agencies have regulatory
jurisdiction over the Company when Company facilities and services are used to
provide intrastate services. Under the Telecommunications Act, states cannot
effectively prohibit any entity from providing telecommunications services, but
the states continue to have general authority to set criteria for reviewing
applications to provide intrastate services (including local services). State
regulators will continue to set the requirements for providers of local and
intrastate services, including quality of services criteria. However, state
regulators can no longer allow (or require) restrictions on the resale of
telecommunications services. State regulators also can regulate the rates
charged by CLECs for intrastate and local services. The Company's provision of
local dial tone and intrastate switched and dedicated services are classified as
intrastate and therefore subject to state regulation. The Company expects that
it will offer more intrastate services as its business and product lines expand.
To provide intrastate service (particularly local dial tone service), the
Company generally must obtain a Certificate of Public Convenience and Necessity
("CPCN") from the state regulatory agency prior to offering service. In most
states, the Company also is required to file tariffs setting forth the terms,
conditions and prices for services that are classified as intrastate, and to
update or amend its tariffs as rates change or new products are added. The
Company may also be subject to various reporting and record-keeping
requirements.
The Company currently holds CPCNs (or their equivalents) from the
states of Alabama, California, Colorado, Florida, Kentucky, North Carolina,
Ohio, Tennessee and Texas. The Company has authority to provide local and
intrastate long distance services in Alabama, California, Colorado, Kentucky,
Ohio, Tennessee and Texas. The Company also has authority in Florida to provide
intrastate long distance services and alternative access services. The Company
also holds a CPCN to provide intrastate long distance services in North Carolina
and applications are pending before the applicable state commission for CPCNs to
provide local telecommunications services in North Carolina and to provide local
and long distance services in Indiana and Oklahoma, as well as to expand the
Company's local telephone service areas in Ohio.
Local Government Authorizations. Under the Telecommunications Act,
local authorities retain jurisdiction under applicable state law to control the
Company's access to municipally owned or controlled rights of way and to require
the Company to obtain street opening and construction permits to install and
expand its fiber optic network. In addition, many municipalities require the
Company to obtain licenses or franchises (which generally have terms of 10 to 20
years) and to pay license or franchise fees, based on a percentage of gross
revenue, in order to provide telecommunication services. In certain states,
however, including California and Colorado, such fees cannot be imposed under
state law. There is no assurance that certain cities that do not impose fees
will not seek to impose fees, nor is there any assurance that, following the
expiration of existing franchises, fees will remain at their current levels. In
many markets, the ILECs have been excused from paying such franchise fees or pay
fees that are materially lower than those required to be paid by the Company for
access to public rights of way. However, under the
19
Telecommunications Act, while municipalities may still regulate use of their
streets and rights of way, municipalities may not prohibit or effectively
prohibit any entity from providing any telecommunications services. In addition,
the Telecommunications Act requires that local governmental authorities treat
telecommunications carriers in a non-discriminatory and competitively neutral
manner. If any of the Company's existing franchise or license agreements are
terminated prior to their expiration dates or not renewed, and the Company is
forced to remove its fiber from the streets or abandon its network in place,
such termination could have a material adverse effect on the Company.
Federal Regulation of Microwave and Satellite Radio Frequencies. The
FCC continues to regulate radio frequency use by both private and common
carriers under the Telecommunications Act. Unlike common carriers, private
carriers contract with select customers to provide services tailored to the
customer's specific needs. The FCC does not currently regulate private carriers
(other than their use of radio frequencies) and has preempted the states from
regulating private carriers insofar as they provide interstate services. The
Company offers certain services as a private carrier.
The Company is required to obtain authorization from the FCC for its
use of radio frequencies to provide satellite and wireless services. The Company
holds a number of satellite earth station licenses in connection with its
operation of satellite-based private carrier networks. The Company also provides
maritime communications services pursuant to an experimental license and a grant
of a STA. In April 1996, the FCC issued a waiver to the Company which may allow
it to obtain a permanent FCC license to provide these services using the same
radio frequencies currently being used under the experimental license. The
Company has filed an application for a permanent license under the terms of the
FCC's waiver decision, and the application is pending. The STA was granted on
January 30, 1997 and enables the Company to conduct operations pursuant to such
application during the FCC's review.
The Telecommunications Act limits ownership or control of an entity
holding a common carrier radio license by non-U.S. citizens, foreign
corporations and foreign governments. Because of these restrictions,
historically the Company and its subsidiaries have not been eligible to hold
common carrier radio licenses used to provide telephone and wireless services.
Therefore, third parties hold certain common carrier licenses and provide
service to the Company over the licensed facilities for resale by the Company to
the Company's customers. The Telecommunications Act permits the FCC to determine
on a case-by-case basis that the public interest will be served by waiving the
foreign ownership restrictions. The Company intends to apply to the FCC for a
waiver of the foreign ownership restrictions that remain applicable to the
Company. If a waiver is granted, or if currently applicable ownership
restrictions are relaxed or removed, the common carrier radio licenses will be
transferred to the Company upon receipt of FCC approval.
Employees
On January 31, 1997, the Company employed a total of 1,483 individuals
on a full time basis. There are 112 employees of one of the Company's
subsidiaries who are subject to collective bargaining agreements which expire on
December 31, 1997 and May 31, 1998. The Company believes that its relations with
its employees are good.
20
ITEM 2. PROPERTIES
The Company's physical properties include owned and leased space for
offices, storage and equipment rooms and collocation sites. Additional space may
be purchased or leased by the Company as networks are expanded. The Company owns
a 30,000 square-foot building located in the Denver metropolitan area. This
facility serves as the Company's corporate headquarters as well as its
nationwide network monitoring and control facility for its Telecom Services
business. The Company currently also leases approximately 116,000 square feet of
office space for operations located in the Denver metropolitan area. As a result
of its recent and anticipated future growth, the Company has acquired property
for its new headquarters and has commenced construction of an office building
that the Company anticipates will accommodate all of the Company's Colorado
operations.
ITEM 3. LEGAL AND ADMINISTRATIVE PROCEEDINGS
SBC has alleged before the San Antonio city council that the Company's
arrangement to license cable being built by City Public Service of San Antonio
("CPS") in greater San Antonio violates state law and has sought to have the San
Antonio city council repudiate the Company's contract with CPS. The assertion of
SBC is that CPS would, through its license arrangement with the Company, be
providing telecommunications services in contravention of Texas state law. In
December 1995, the San Antonio city council imposed a moratorium on network
construction which expired in March 1996. The Company believes it has a valid
contract with CPS and filed suit against SBC in December 1995 in the District
Court for the Western District of Texas, San Antonio Division seeking, among
other things, damages for tortious interference and a declaratory judgment that
the contract with CPS is legal and binding. SBC's motion to dismiss that suit
was granted by the Court and ICG's appeal of that decision is pending before the
U.S. Court of Appeals for the Fifth Circuit. In June 1996, ICG filed suit in
State Court in San Antonio seeking a declaration that the contract is valid
under state law. In addition, in May 1996, the Company filed a petition with the
FCC seeking preemption of Texas state law under the Telecommunications Act. That
petition currently is pending before the FCC.
ICG and its subsidiaries are not parties to any material litigation.
The continuing participation by ICG and its subsidiaries in regulatory
proceedings before the FCC and state regulatory agencies concerning the adoption
of new regulations is unlikely to result in a material adverse effect on the
financial condition and results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
ICG Common Stock, $.01 par value per share, has been listed on the
American Stock Exchange ("AMEX") since August 5, 1996 under the symbol "ICG."
Prior to that time, Holdings-Canada's Common Shares had been listed on the AMEX
under the symbol "ITR" from January 14, 1993 through February 28, 1996, and
under the symbol "ICG" thereafter through August 2, 1996. Holdings-Canada Common
Shares ceased trading on the AMEX at the close of trading on August 2, 1996.
Holdings-Canada Class A Common Shares are listed on the Vancouver Stock Exchange
("VSE") under the new symbol "IHC.A."
The following table sets forth, for the fiscal periods indicated, the
high and low sale prices of the Common Shares as reported on the AMEX through
August 2, 1996, and the VSE through the date indicated below, and the high and
low sales prices of the Common Stock as reported on the AMEX from August 5, 1996
through the date indicated below. The table also sets forth the average of the
monetary exchange rates on the last day of each such fiscal period.
American Stock Vancouver Stock Exchange
Exchange (1) Exchange (1) Rate
------------------ -------------------- -----------
High Low High Low (C$/$)
------ -------- ------ ----------- -----------
Fiscal Year
Ended September
30, 1995
First Quarter $17.88 $12.38 C$ 33.50 C$ 18.50 1.38
Second Quarter 14.13 9.38 19.75 17.38 1.40
Third Quarter 13.25 6.63 18.00 18.00 1.36
Fourth Quarter 14.00 8.00 - - 1.34
Fiscal Year
Ended September
30, 1996
First Quarter $12.75 $ 8.63 C$ - C$ - 1.36
Second Quarter 17.88 10.25 - - 1.37
Third Quarter 27.38 17.13 17.50 17.50 1.36
Fourth Quarter 25.88 19.13 - - 1.36
Three Months
Ended December
31, 1996 (2) $22.25 $ 14.00 C$ 28.35 C$ 28.35 1.37
Fiscal Year
Ended December
31, 1997(2)
Through February
18, 1997 $18.13 $14.50 C$ - C$ - 1.35
----------------
(1) Effective at the close of trading on August 2, 1996, Holdings-Canada's
Common Shares ceased trading on the AMEX and the Common Stock commenced
trading on the AMEX on August 5, 1996. The Common Stock is not traded
on the VSE. The Class A Common Shares trade on the VSE and all
information reported on the above table from August 5, 1996 to the date
indicated above with respect to the VSE relates only to the Class A
Common Shares.
(2) The Company has elected to change its fiscal year end to December 31
from September 30, effective January 1, 1997.
22
On February 18, 1997, the last reported sale price for the Common Stock on
the AMEX was $14.75 per share. On February 18, 1997, there were 31,299,392
shares of Common Stock outstanding and 101 holders of record.
The Company has never declared or paid dividends on the Common Stock and
does not intend to pay cash dividends on the Common Stock in the foreseeable
future. ICG intends to retain future earnings, if any, to finance the
development and expansion of its business. In addition, the payment of any
dividends on the Common Stock is effectively prohibited by the restrictions
contained in the Company's indentures and in the First Amended and Restated
Articles of Incorporation of Holdings, which prohibits Holdings from making any
material payment to the Company. Certain of the Company's debt facilities
contain covenants which also may restrict the Company's ability to pay cash
dividends.
The Company has not made any sales of unregistered securities during fiscal
1996 or the three months ended December 31, 1996.
23
ITEM 6. SELECTED FINANCIAL DATA
The selected historical financial data for each fiscal year in the
five-year period ended September 30, 1996 and for the three months ended
December 31, 1996 has been derived from the audited Consolidated Financial
Statements of the Company. The information set forth below should be read in
conjunction with the Consolidated Financial Statements of the Company and the
notes thereto included elsewhere in this Transition Report. Results of
operations for the three months ended December 31, 1996 are not necessarily
indicative of results of operations for a full year or predictive of future
periods. The Company's development and expansion activities, including
acquisitions, during the periods shown below materially affect the comparability
of this data from one period to another. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Three Months
Years Ended September 30, Ended December
------------------------------------------------------------------------ 31,
Statement of Operations Data: 1992 1993 1994 1995 1996 1996
----------- ----------- ----------- ---------- ------------ -----------------
(in thousands, except per share amounts)
Revenue:
Telecom services $ 1,061 4,803 14,854 32,330 87,681 34,787
Network services 4,955 21,006 36,019 58,778 60,116 15,981
Satellite services (1) 1,468 3,520 8,121 20,502 21,297 6,188
Other 126 147 118 - - -
----------- ----------- ----------- ---------- ------------ -----------------
Total revenue 7,610 29,476 59,112 111,610 169,094 56,956
Operating costs 5,423 18,961 38,165 78,846 135,253 49,929
Selling, general and
administrative expenses 3,921 10,702 28,015 62,954 76,725 24,253
Depreciation and amortization 1,602 3,473 8,198 16,624 30,368 9,825
----------- ----------- ----------- ---------- ------------ -----------------
Total operating costs
and expenses 10,946 33,136 74,378 158,424 242,346 84,007
----------- ----------- ----------- ---------- ------------ -----------------
Operating loss (3,336) (3,660) (15,266) (46,814) (73,252) (27,051)
Interest expense (525) (2,523) (8,481) (24,368) (85,714) (24,454)
Minority interests, including
preferred stock dividends 21 (302) 435 (1,123) (25,306) (4,988)
Other income (expense), net 12 324 (556) (4,343) (1,513) 6,670
----------- ----------- ----------- ---------- ------------ -----------------
Loss before income taxes and
cumulative effect of change
in accounting (3,828) (6,161) (23,868) (76,648) (185,785) (49,823)
Income tax benefit 174 1,552 - - 5,131 -
Cumulative effect of change in
accounting (2) - - - - (3,453) -
----------- ----------- ----------- ---------- ------------ -----------------
Net loss $ (3,654) (4,609) (23,868) (76,648) (184,107) (49,823)
=========== =========== =========== ========== ============ =================
Loss per share $ (0.42) (0.39) (1.56) (3.25) (6.83) (1.56)
=========== =========== =========== ========== ============ =================
Weighted average number of
shares outstanding (3) 8,737 11,671 15,342 23,604 26,955 31,840
=========== =========== =========== ========== ============ =================
Other Data:
EBITDA (4) $ (1,734) (187) (7,068) (30,190) (42,884) (17,226)
Capital expenditures (5) $ 12,599 20,685 54,921 88,495 175,148 78,238
24
At
At September 30, December
-------------------------------------------------------------------- 31,
Balance Sheet Data: 1992 1993 1994 1995 1996 1996
----------- --------- ----------- ----------- ----------- ------------
(in thousands)
Working capital (deficit) $ (392) 7,990 (8,563) 249,089 446,164 361,601
Total assets 54,417 95,196 201,991 583,553 939,351 944,133
Notes payable and current portion of
long-term debt and capital lease 991 7,657 23,118 27,310 8,282 25,500
obligations
Long-term debt and capital lease
obligations, less current portion 15,565 37,116 104,461 405,535 739,827 761,504
Redeemable preferred stock of Holdings - - - 14,986 153,318 159,120
Stockholders' equity (deficit) 21,826 34,753 39,782 82,535 (19,588) (66,080)
(1) Revenue from Satellite Services is generated through the Company's
satellite (voice and data) operations and, after January 1995, also
includes revenue from maritime communications operations. The Company
completed the sale of four of its teleports in March, 1996, and has
reported results of operations from these assets through December 31,
1995.
(2) During fiscal 1996, the Company changed its method of accounting for
long-term telecom services contracts to recognize revenue as services
are provided. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Accounting Changes." As required
by generally accepted accounting principles, the Company has reflected
the effects of the change in accounting as if such change had been
adopted as of October 1, 1995. The Company's results for the year ended
September 30, 1996 reflect a charge of $3.5 million relating to the
cumulative effect of this change in accounting as of October 1, 1995.
The effect of this change in accounting for fiscal year 1996 was not
significant. If the new revenue recognition method had been applied
retroactively, telecom services revenue would have decreased by $0.3
million, $2.0 million, $0.5 million and $0.7 million for fiscal 1992,
1993, 1994 and 1995, respectively.
(3) Weighted average number of shares outstanding for fiscal years 1992,
1993, 1994 and 1995 represents Holdings-Canada common shares
outstanding. Weighted average number of shares outstanding for fiscal
1996 represents Holdings-Canada common shares outstanding for the
period October 1, 1995 through August 2, 1996, and represents ICG
Common Stock and Holdings-Canada Class A common shares (owned by third
parties) outstanding for the period August 5, 1996 through September
30, 1996. Weighted average number of shares outstanding for the
three-month period ended December 31, 1996 represents ICG Common Stock
and Holdings-Canada Class A common shares (owned by third parties)
outstanding for the period October 1, 1996 through December 31, 1996.
(4) EBITDA consists of operating loss plus depreciation and amortization.
EBITDA is provided because it is a measure commonly used in the
telecommunications industry. EBITDA is presented to enhance an
understanding of the Company's operating results and is not intended to
represent cash flow or results of operations in accordance with
generally accepted accounting principles for the periods indicated. See
the Company's Consolidated Financial Statements contained elsewhere in
this Transition Report.
25
(5) Capital expenditures include assets acquired under capital leases and
through the issuance of debt or warrants.
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion includes certain forward-looking statements
which are affected by important factors including, but not limited to,
dependence on increased traffic on the Company's facilities, the successful
implementation of the Company's local dial tone and long distance strategies and
actions of competitors and regulatory authorities that could cause actual
results to differ materially from the forward-looking statements. The results
for the three months ended December 31, 1995 have been derived from the
Company's unaudited Consolidated Financial Statements included herein.
Company Overview
The Company provides Telecom Services, Network Services and Satellite
Services. Telecom Services consist primarily of the Company's CLEC operations.
The Company is one of the largest providers of competitive local telephone
services in the United States, based on estimates of the industry's 1995
revenue. Network Services consist of information technology services and
selected networking products, focusing on network design, installation,
maintenance and support. Satellite Services consist of maritime and
international satellite transmission services and provide private data networks
utilizing VSATs. As a leading participant in the rapidly growing competitive
local telecommunications industry, the Company has experienced significant
growth, with total revenues increasing from $59.1 million for fiscal 1994 to
$190.7 million for the 12-month period ended December 31, 1996. The Company's
rapid growth is the result of the initial installation, acquisition and
subsequent expansion of its fiber optic networks, the acquisition and growth of
its network systems integration business and, prior to fiscal 1996, growth in
Satellite Services.
Prior to fiscal 1996, the majority of the Company's revenue had been
derived from Network Services. However, the Company's Network Services revenue
(as well as Satellite Service revenue) will continue to represent a diminishing
percentage of the Company's consolidated revenue as the Company continues to
emphasize its Telecom Services. In March 1996, the Company completed the sale of
four of its teleports which were used in the Company's Satellite Services
operations.
The Company's operating networks have grown from 323 fiber route miles
at the end of fiscal 1994 to 2,385 fiber route miles at December 31, 1996.
Telecom Services revenue has increased from $14.9 million for fiscal 1994 to
$109.0 million for the 12-month period ended December 31, 1996. The Company has
experienced declining access unit prices and increasing price competition which
have been more than offset by increasing network usage. The Company expects to
continue to experience declining access unit prices and increasing price
competition for the foreseeable future.
The Company expects to continue to experience negative operating
margins from the provision of switched access services while its networks are in
the development and construction phases, during which the Company relies on ILEC
networks to carry a significant portion of its customers' switched traffic. The
Company expects to realize improved operating margins from
27
switched services on a given network when (i) increased volumes of traffic are
attained and build-out enables such traffic to be carried on the Company's own
network instead of ILEC facilities, and (ii) higher margin enhanced services are
provided to customers on the Company's network. In addition, the Company
believes that the unbundling of ILEC services and the implementation of local
telephone number portability, which are mandated by the Telecommunications Act,
will reduce the Company's costs of providing switched services and facilitate
the marketing of such services. However, the Company's switched access services
strategy has not yet been profitable and may not become profitable due to, among
other factors, lack of customer demand, competition from other CLECs and
downward pricing pressure from the ILECs.
The Company believes that the provisions of the Telecommunications Act,
including the opening of the local telephone services market to competition, the
unbundling of ILEC services and the implementation of local telephone number
portability, will facilitate the Company's plan to provide a full array of
local, long distance and data communications services. In order to fully
implement its strategy, the Company must make significant capital expenditures
to provide additional switching capacity, network infrastructure and electronic
components. The Company must also make significant investments and expenditures
to develop, train and manage its marketing and sales personnel. The Company has
limited experience providing such services and there can be no assurance that
the Company will be successful.
The continued development, construction and expansion of the Company's
business requires significant capital, a large portion of which is expended
before any revenue is generated. The Company has experienced, and expects to
continue to experience, negative cash flow and significant losses while it
expands its operations to provide a wide range of telecommunications services
and establishes a sufficient revenue-generating customer base. There can be no
assurance that the Company will be able to establish or retain such a customer
base. When constructing and relying principally on its own facilities, the
Company has experienced a period of up to 18 months from initial design of a
network to revenue generation for that network. However, using leased ILEC
facilities to provide initial customer service and the Company's new agreements
to use utilities' existing fiber, the Company has experienced initial revenue
generation within nine months after commencing network design.
28
Results of Operations
The following table provides a breakdown of revenue and operating costs
for Telecom Services, Network Services and Satellite Services and certain other
financial data for the Company for the periods indicated. The table also shows
certain revenue, expenses, operating loss and EBITDA as a percentage of the
Company's total revenue.
Three Months
Years Ended September 30, Ended December 31,
-------------------------------- --------------------------
1994 1995 1996 1995 1996
--------- --------- -------- ----------- ------------
$ % $ % $ % $ % $ %
---- ----- ----- --- --- ---- ----- ----- ----- ----
(Dollars in thousands)
Revenue:
Telecom
services(1) 14,854 25 32,330 29 87,681 52 13,513 38 34,787 61
Network services 36,019 61 58,778 53 60,116 36 15,718 45 15,981 28
Satellite services 8,121 14 20,502 18 21,297 12 6,168 17 6,188 11
Other 118 * - - - - - - - -
------- -- ------ -- ------ -- ------ -- ------ --
Total revenue 59,112 100 111,610 100 169,094 100 35,399 100 56,956 100
Operating costs:
Telecom services 7,050 21,825 78,705 11,882 34,463
Network services 26,334 45,928 46,256 11,998 12,287
Satellite services 4,697 11,093 10,292 3,230 3,179
Other 84 - - - -
------ -- ------ -- ------ -- ------ -- ------ --
Total operating
costs 38,165 65 78,846 71 135,253 80 27,110 77 49,929 88
Selling,general
and adminis-
trative 28,015 47 62,954 56 76,725 45 18,628 53 24,253 43
Depreciation and
amortization 8,198 14 16,624 15 30,368 18 4,919 14 9,825 17
------ -- ------ -- ------ -- ------ -- ------ --
Operating loss (15,266)(26)(48,814)(42)(73,252)(43) (15,258)(43)(27,051)(47)
EBITDA (2) (7,068)(12)(30,190)(27)(42,884)(25) (10,339)(29)(17,226)(30)
- ----------
*Less than 0.5%
(1) During fiscal 1996, the Company change its method of accounting for long-
term telecom services contracts to recognize revenue as services are
provided. See "-Accounting Changes." The effect of this change in
accounting for the periods presented was not significant.
(2) See note 4 under "Selected Financial Data" for the definition of EBITDA.
29
Three Months Ended December 31, 1996 Compared to Three Months Ended December 31,
1995
Revenue. Revenue for the three months ended December 31, 1996 increased
$21.6 million, or 61%, from the three months ended December 31, 1995. The
increase in total revenue reflects continued growth in Telecom Services, Network
Services and Satellite Services, offset slightly by the loss in revenue
resulting from the sale of four of the Company's teleports during the second
quarter of fiscal 1996. Telecom Services revenue increased 157% to $34.8 million
due to an increase in network usage for both special and switched access
services, offset in part by a decline in average unit pricing. Switched services
revenue increased from $6.0 million (44% of Telecom Services revenue) for the
three months ended December 31, 1995, to $23.9 million (69% of Telecom Services
revenue) for the three months ended December 31, 1996, of which $7.5 million
relates to revenue from Zycom compared to $0.9 million for the three months
ended December 31, 1995. Approximately $6.5 million of the increase in Zycom
revenue for the three months ended December 31, 1996 as compared to the same
period in 1995 relates to changes in the classification of certain operating
costs as a result of the Company entering into long-term contracts with its
major customers. Network usage as reflected in voice grade equivalents ("VGEs")
increased 53% from 488,403 VGEs on December 31, 1995 to 748,528 on December 31,
1996. On December 31, 1996, the Company had 2,069 buildings connected to its
networks compared to 1,539 buildings connected on December 31, 1995. Consistent
with expectations, Network Services revenue growth has been moderate, increasing
from $15.7 million to $16.0 million for the three months ended December 31, 1995
and 1996, respectively, while the Company continues to reposition its systems
and operations to improve operating results. Satellite Services revenue remained
relatively stable between the three-month periods ended December 31, 1995 and
1996 as a result of the offsetting effects of increased maritime minutes of use
from cruise ships and no revenue in the three months ended December 31, 1996
from the four teleports sold in March 1996. On a pro forma basis to reflect the
sale of the teleports, the Company's Satellite Services revenue for the three
months ended December 31, 1995 and 1996 was $3.7 million and $6.2 million,
respectively.
Operating costs. Total operating costs for the three months ended
December 31, 1996 increased $22.8 million, or 84%, from the same period in 1995.
Telecom Services operating costs increased from $11.9 million, or 88%, of
Telecom Services revenue for the three months ended December 31, 1995, to $34.5
million, or 99%, of Telecom Services revenue for the three months ended December
31, 1996. Telecom Services operating costs consist of payments to ILECs for the
use of network facilities to support off-net and switched access services,
network operating costs, right of way fees and other costs. The increase in
operating costs in absolute dollars is attributable to the increase in switched
access services and the addition of engineering personnel dedicated to the
development of local exchange services. The increase in operating costs as a
percentage of revenue is due primarily to the increase in switched access
services revenue, which generates negative margins as a result of the higher
costs associated with utilizing ILEC network facilities and the investment in
the development of local exchange services without the benefit of corresponding
revenue in the same period. The Company expects that the Telecom Services ratio
of operating costs to revenue will continue to increase until the Company
provides a greater volume of higher margin services, principally local telephone
services, carries more traffic on its own facilities rather than the ILEC
facilities, and obtains the right to use unbundled ILEC facilities on
satisfactory terms, any or all of which may not occur. Network Services
operating costs
30
increased 2% to $12.3 million for the three months ended December 31, 1996 and
increased as a percentage of Network Services revenue from 76% to 77% for the
three month periods ended December 31, 1995 and 1996, respectively. Network
Services operating costs include the cost of equipment sold, direct hourly labor
and other indirect project costs. Satellite Services operating costs decreased
2% to $3.2 million for the three months ended December 31, 1996. Satellite
Services operating costs as a percentage of revenue declined to 51% of Satellite
Services revenue during the three months ended December 31, 1996, from 52%
during the three months ended December 31, 1995. The decrease in percentage of
revenue as well as absolute dollars is attributable to the decline in revenue
resulting from the sale of four of the Company's teleports in March 1996, offset
by an increase in higher margin maritime services revenue at MTN. Revenue from
teleport operations historically have yielded lower gross margins than maritime
services revenue. Satellite Services operating costs consist primarily of
satellite transponder lease costs and costs of equipment sold.
Selling, general and administrative expense. Selling, general and
administrative ("SG&A") expense for the three months ended December 31, 1996
increased $5.6 million, or 30%, compared to the three months ended December 31,
1995. This increase was principally due to the continued rapid expansion of the
Company's Telecom Services networks and related significant additions to the
Company's management information systems, customer service, marketing and sales
staffs dedicated to the expansion of the Company's networks and implementation
of the Company's expanded services strategy, primarily the development of local
telephone services. SG&A expense as a percentage of total revenue was 43% for
the three months ended December 31, 1996, compared to 53% for the same period in
1995. There is typically a period of higher administrative and marketing expense
prior to the generation of appreciable revenue from new products and services or
newly developed markets. SG&A expense for Network Services decreased both in
absolute dollars and as a percentage of Network Services revenue due to the cost
control efforts by the Company's management and due to approximately $0.7
million in non-recurring charges, primarily legal accruals, recorded during the
three months ended December 31, 1995. Satellite Services SG&A expense decreased
in absolute dollars and as a percentage of Satellite Services revenue due to
cost control efforts by the Company's management. Other corporate expenses
increased from $4.0 million, or 11% of total revenue, for the three months ended
December 31, 1995 to $5.7 million, or 10% of total revenue, for the three months
ended December 31, 1996. This increase is primarily attributable to the addition
of employees, principally human resources and regulatory personnel, for the
purpose of managing the Company's growth and its expansion into new markets as
allowed under the Telecommunications Act. The Company expects SG&A expense
(principally for Telecom Services) to increase in absolute dollars over the near
term to facilitate the development and marketing of local services and the
commencement of marketing services (including long distance and data
transmission services) to business end user customers.
Depreciation and amortization expense. Depreciation and amortization
expense increased $4.9 million, or 100%, for the three months ended December 31,
1996, as compared to the same period in 1995. Depreciation of fixed assets
increased by approximately $2.3 million as a result of the shortening of
estimated depreciable lives during fiscal 1996, as discussed in "-Accounting
Changes," and an increase in depreciable fixed assets due to the continued
expansion of the Company's networks. The increase in depreciation expense was
offset slightly due to the decrease
31
in depreciable assets resulting from the sale of four of the Company's teleports
in March 1996. The Company reports high levels of depreciation expense relative
to revenue during the early years of operation of a new network because the full
cost of a network is depreciated using the straight line method despite the low
rate of capacity utilization in the early stages of network operation.
Interest expense. Interest expense increased by $9.3 million, from
$15.2 million for the three months ended December 31, 1995 to $24.5 million for
the three months ended December 31, 1996, which included $22.7 million of
non-cash interest. This increase was attributable to an increase in long-term
debt, primarily the 12 1/2% Senior Discount Notes (the "12 1/2% Notes") issued
in April 1996, and an increase in capitalized lease obligations to finance
Telecom Services equipment used in the expansion of the Company's networks.
Interest income. Interest income increased $2.2 million from the three
months ended December 31, 1995 to $6.0 million for the three months ended
December 31, 1996. The increase is attributable to the interest earned on the
proceeds from the issuance of the 12 1/2% Notes and the 14 1/4% Exchangeable
Preferred Stock ("14 1/4% Preferred Stock") in April 1996.
Share of losses in joint venture. Effective October 1, 1996, the
Company sold its 50% interest in the Phoenix network joint venture. As a result,
no share of losses in joint venture was recorded during the three months ended
December 31, 1996, as compared to the $0.2 million recorded during the same
period in 1995. Future results will include the Company's share of losses from
the joint venture with CSW.
Other, net. Other, net fluctuated $1.7 million from $1.0 million net
expense in the three months ended December 31, 1995 to $0.7 million net income
in the three months ended December 31, 1996. Other expense recorded in the
three-month period ended December 31, 1995 represents the write-off of deferred
financing costs on a credit facility that was fully paid in December 1995. Other
income recorded in the three-month period ended December 31, 1996 is primarily
attributable to the $0.8 million gain recognized in conjunction with the sale of
the Company's 50% interest in the Phoenix network joint venture.
Minority interest in share of losses, net of accretion and preferred
dividends on subsidiary preferred stock. Minority interest in share of losses,
net of accretion and preferred dividends on subsidiary preferred stock increased
$1.8 million, from $3.2 million for the three months ended December 31, 1995 to
$5.0 million for the three months ended December 31, 1996. The increase is due
primarily to the issuance of the 14 1/4% Preferred Stock in April 1996. Minority
interest in share of losses, net of accretion and preferred dividends on
subsidiary preferred stock recorded during the current three-month period
consists of the accretion of issue costs ($0.1 million) and the accrual of the
preferred stock dividend ($5.7 million) associated with the 14 1/4% Preferred
Stock, offset by minority interest in losses of subsidiaries of $0.8 million.
Cumulative effect of change in accounting for revenue from long-term
telecom services contracts. The cumulative effect of change in accounting for
revenue from long-term telecom services contracts recorded during the three
months ended December 31, 1995 is due to the change in accounting principle as
described in "-Accounting Changes." As the change in accounting was
32
applied retroactively as of October 1, 1995, no similar amounts were recorded
during the three months ended December 31, 1996.
Fiscal 1996 Compared to Fiscal 1995
The following information reflects the results of operations for fiscal
1996 compared to the pro forma results of operations for fiscal 1995, assuming
the change in accounting for long-term telecom services contracts described in
"-Accounting Changes" had been applied retroactively.
Revenue. Revenue for fiscal 1996 increased $58.2 million, or 52%, from
fiscal 1995. The increase in total revenue reflects continued growth in Telecom
Services, Network Services and Satellite Services, offset slightly by the loss
in revenue resulting from the sale of four of the Company's teleports. Telecom
Services revenue increased 177% to $87.7 million due to an increase in network
usage for both special and switched access services, offset in part by a decline
in average unit prices. Switched services revenue increased from $7.2 million
(22% of Telecom Services revenue) for fiscal 1995, to $51.6 million (59% of
Telecom Services revenue) for fiscal 1996, of which $14.9 million relates to
revenue from Zycom compared to $1.4 million in fiscal 1995. Approximately $10.6
million of the increase in Zycom revenue relates to changes in the
classification of certain operating costs as a result of the Company entering
into long-term contracts with its major customers. Network usage as reflected in
VGEs increased 47% from 430,535 VGEs on September 30, 1995, to 630,697 VGEs on
September 30, 1996. On September 30, 1996, the Company had 2,067 buildings
connected to its networks compared to 1,375 buildings connected on September 30,
1995. Consistent with expectations, Network Services revenue growth has been
moderate, increasing from $58.8 million to $60.1 million, while the Company
continues to reposition its systems and operations to improve operating results.
Satellite Services revenue increased 4% to $21.3 million for fiscal 1996
primarily due to increased maritime minutes of use from cruise ships offset in
part by the decrease resulting from the sale of four of the Company's teleports.
Satellite Services revenue for fiscal 1995 and 1996, on a pro forma basis to
reflect the sale of teleports, was $11.4 million and $18.9 million,
respectively. Satellite Services revenue decreased $0.4 million from the third
quarter of fiscal 1996 to the fourth quarter of fiscal 1996. The decrease in
revenue was primarily due to three Navy vessels being in "dry dock."
Operating costs. Total operating costs for fiscal 1996 increased $56.4
million, or 72%, from fiscal 1995. Telecom Services operating costs increased
from $21.8 million, or 69% of Telecom Services revenue for fiscal 1995, to $78.7
million, or 90% of Telecom Services revenue for fiscal 1996. The increase in
operating costs in absolute dollars is attributable to the increase in switched
access services and the expansion in off-net special access service offerings.
The increase in operating costs as a percentage of total revenue is due
primarily to the increase in switched access services revenue, which generates
negative margins as a result of the higher costs associated with utilizing ILEC
network facilities and the investment in the development of local exchange
services without the benefit of corresponding revenue in the same period. The
Company expects that the Telecom Services ratio of operating costs to revenue
will continue to increase until the Company carries more traffic on its own
facilities rather than the ILEC facilities, provides a greater volume of higher
margin services, principally local telephone services, and obtains the right to
use unbundled ILEC facilities on satisfactory terms, any or all of which may not
occur.
33
Network Services operating costs increased 1% to $46.3 million and decreased as
a percentage of Network Services revenue from 78% for fiscal 1995 to 77% for
fiscal 1996. Satellite Services operating costs decreased to $10.3 million for
fiscal 1996, from $11.1 million for fiscal 1995. Satellite Services operating
costs as a percentage of revenue also declined to 48% for fiscal 1996, compared
to 54% for fiscal 1995. The decrease both in absolute dollars and as a
percentage of revenue is attributable to the decline in revenue resulting from
the sale of four of the Company's teleports, partially offset by an increase in
higher margin maritime services revenue at MTN.
Selling, general and administrative expense. SG&A expense for fiscal
1996 increased $13.8 million, or 22%, compared to fiscal 1995. This increase was
principally due to the continued rapid expansion of the Company's Telecom
Services networks and related significant additions to the Company's management
information systems, marketing and sales staff dedicated to the expansion of the
Company's networks and implementation of the Company's switched services
strategy and development of local telephone services. A portion of the increase
was also attributable to approximately $1.8 million of legal, accounting, and
SEC filing fees incurred in the incorporation of a new U.S. publicly traded
holding company, ICG Communications, Inc., and approximately $1.3 million of
consulting fees related to various process improvement initiatives. SG&A expense
as a percentage of total revenue was 45% for fiscal 1996, compared to 57% for
fiscal 1995. SG&A expense for Network Services increased due to increased
engineering, marketing and sales staff to support growth in network system
installations. Satellite Services SG&A expense increased primarily due to the
growth of MTN and MCN.
Depreciation and amortization. Depreciation and amortization increased
$13.7 million, or 83%, for fiscal 1996 compared to fiscal 1995. Depreciation of
fixed assets increased by approximately $7.0 million as a result of the
shortening of estimated depreciable lives discussed in "-Accounting Changes,"
and an increase in depreciable fixed assets due to the continued expansion of
the Company's networks. The increase in depreciation expense was offset slightly
due to the decrease in depreciable assets resulting from the sale of four of the
Company's teleports.
Interest expense. Interest expense increased by $61.3 million, from
$24.4 million for fiscal 1995 to $85.7 million for fiscal 1996, which included
$66.5 million of non-cash interest. This increase was attributable to an
increase in long-term debt, primarily the 13 1/2% Senior Discount Notes (the "13
1/2% Notes") issued in August 1995 and the 12 1/2% Notes issued in April 1996,
and an increase in capitalized lease obligations to finance the purchase of
Telecom Services and Satellite Services equipment. Also included in interest
expense is a charge of approximately $11.5 million for the payments made to
holders of the 13 1/2% Notes with respect to consents to amendments to the
indenture governing the 13 1/2% Notes in order to permit the 1996 Offering (as
defined herein) in April 1996.
Interest income. Interest income increased $15.1 million from fiscal
1995. The increase is attributable to the increase in cash from the proceeds of
the issuance of the 13 1/2% Notes in August 1995 and the 12 1/2% Notes and 14
1/4% Preferred Stock in April 1996.
Share of losses in joint venture. Share of losses in the Phoenix
network joint venture, in which the Company held a 50% equity interest,
increased $1.1 million, or 145%, from fiscal 1995
34
to $1.8 million for fiscal 1996 due to increased losses resulting from the
continued expansion and implementation of switched access services. Effective
October 1, 1996, the Company sold its interest in the Phoenix network joint
venture.
Provision for impairment of goodwill, investment and notes receivable.
Provision for impairment of goodwill, investment and notes receivable increased
$2.9 million from fiscal 1995 to $9.9 million for fiscal 1996. The current year
amount includes valuation allowances for the amounts receivable for advances
made to the Phoenix network joint venture included in long-term notes receivable
($5.8 million), the investment in the Melbourne network ($2.7 million) and the
note receivable from NovoComm, Inc. ($1.3 million). The allowances were a result
of management's estimate of the realizable value of the assets as of September
30, 1996.
Other, net. Other, net increased $8.3 million for fiscal 1996 from $0.8
million for fiscal 1995 due primarily to the loss on the sale of four of the
Company's teleports and certain other satellite assets ($1.1 million), the
write-off of certain assets ($2.5 million), settlement costs of certain
litigation ($1.2 million) and the write-off of deferred financing costs upon
conversion or settlement of debt ($2.7 million).
Minority interest in share of losses, net of accretion and preferred
dividends on subsidiary preferred stock. Minority interest in share of losses,
net of accretion and preferred dividends on subsidiary preferred stock increased
$24.2 million, from $1.1 million for fiscal 1995 to approximately $25.3 million
for fiscal 1996. The increase is due to the accretion of the Unit Warrants (as
defined herein) ($14.4 million) and issue costs ($1.1 million) associated with
the issuance of the 12% redeemable preferred stock of Holdings (the "Redeemable
Preferred Stock"), accretion of issue costs associated with the 14 1/4%
Preferred Stock ($0.3 million), accrual of the preferred stock dividend on the
Redeemable Preferred Stock ($2.1 million) and the 14 1/4% Preferred Stock ($9.1
million) and the excess redemption price over the stated value of the
convertible Series B Preferred Stock of Holdings-Canada ("Convertible Preferred
Stock of Holdings-Canada") ($1.0 million), partially offset by the minority
interest in losses of subsidiaries.
Income tax benefit. Income tax benefit for fiscal 1996 was $5.1 million.
The income tax benefit is due to an adjustment to the deferred tax liability as
a result of the change in estimated depreciable lives.
Cumulative effect of change in accounting for revenue from long-term
telecom services contracts. The increase in cumulative effect of change in
accounting for revenue from long-term telecom services contracts is due to the
change in accounting as described in "-Accounting Changes."
35
Fiscal 1995 Compared to Fiscal 1994
The following information reflects the pro forma results of operations for
fiscal 1995 compared to the pro forma results of operations for fiscal 1994,
assuming the change in accounting for long-term telecom services contracts
described in "-Accounting Changes" had been applied retroactively.
Revenue. Revenue for fiscal 1995 increased $52.2 million, or 89%, from
fiscal 1994, reflecting continued growth in Telecom Services, Network Services
and Satellite Services operations. Telecom Services revenue increased 120% to
$31.6 million. The increase in Telecom Services revenue reflects an increase in
network usage, which was partially offset by a decline in average unit prices,
and the acquisition in April 1994 of networks in the Los Angeles and San
Francisco metropolitan areas, which were included for the full year in fiscal
1995. Network usage as reflected in VGEs increased 92% from 224,072 VGEs on
September 30, 1994 to 430,535 VGEs on September 30, 1995. On September 30, 1995,
the Company had 1,375 buildings connected to its networks compared to 226
buildings connected on September 30, 1994. Network Services revenue increased
63% to $58.8 million primarily from the acquisition of DataCom Integrated
Systems Corporation ("DISC"), which was included for the full year in fiscal
1995 and which subsequently merged into Network Services, as well as from new
network system installations. The increase in network system installations
resulted from additional projects from existing customers and an increase in
general demand for local area networks due to increased business networking
requirements. Satellite Services revenue increased 152% to $20.5 million for
fiscal 1995, which resulted principally from the acquisitions of Nova-Net, MTN
and teleports located in the metropolitan Atlanta and New York areas which
generated $3.9 million, $7.5 million and $4.4 million in revenue, respectively,
for fiscal 1995. Satellite Services revenue for fiscal 1995, as adjusted to
reflect the sale of four of the Company's teleports, was $11.4 million.
Operating costs. Total operating costs for fiscal 1995 increased $40.7
million, or 107%, from fiscal 1994. Telecom Services operating costs increased
from $7.1 million, or 49% of Telecom Services revenue for fiscal 1994, to $21.8
million, or 69% of Telecom Services revenue for fiscal 1995. Telecom Services
operating costs increased in absolute terms as well as a percentage of revenue
due to an expansion in off-net service offerings, for which the Company leases
network facilities from local telephone companies, and the implementation of
switched access services, which generated negative margins due to the costs
associated with reselling ILEC network facilities. Network Services operating
costs increased 74% to $45.9 million primarily due to an increased volume of
Network Services business. Network Services operating costs as a percentage of
revenue increased from 73% for fiscal 1994 to 78% for fiscal 1995 due to rapid
expansion and the inclusion in Network Services operating costs of project
managers and operations personnel directly associated with network systems
projects in fiscal 1995, which were treated as SG&A costs in 1994. Satellite
Services operating costs increased to $11.1 million, or 54% of Satellite
Services revenue, for fiscal 1995, from $4.7 million, or 58% of Satellite
Services revenue, for fiscal 1994. This increase in absolute terms was
attributable to an increased volume of Satellite Services business primarily due
to the acquisition of Nova-Net and MTN, and increased usage of leased satellite
transponders. The decrease in operating costs as a percentage of revenue is
attributable to the higher margins associated with MTN, which represented a
larger portion of Satellite Services revenue in fiscal 1995, as opposed to video
and data transmission services.
36
Selling, general and administrative expense. SG&A expense for fiscal
1995 increased $34.9 million, or 125%, compared to fiscal 1994. This increase
was principally due to the continued rapid expansion of the Company's networks,
including the acquisition of networks in the Los Angeles and San Francisco
metropolitan areas during the third quarter of fiscal 1994 and related
significant additions to the Company's management information systems, marketing
and sales staffs dedicated to the expansion of the Company's networks and
implementation of the Company's switched access services strategy. SG&A expense
as a percentage of total revenue was 57% for fiscal 1995 compared to 48% for
fiscal 1994. There is typically a period of higher administrative and marketing
expense prior to the generation of appreciable revenue from newly acquired or
newly developed networks or markets. SG&A expense for Network Services increased
due to increased engineering, marketing and sales staff to support increased
growth in network systems installations. Satellite Services SG&A increased due
to the acquisitions of teleports in metropolitan Atlanta and New York, the
acquisition of the Company's VSAT operations during the third quarter of fiscal
1994, and the acquisition of MTN during the second quarter of fiscal 1995.
Depreciation and amortization. Depreciation and amortization increased
$8.4 million, or 103%, for fiscal 1995 compared to fiscal 1994. This increase
resulted from an increased investment in depreciable fixed assets as a result of
the acquisition of new networks and the expansion of existing networks and
Satellite Services facilities.
Interest expense. Interest expense increased $15.9 million, from $8.5
million for fiscal 1994 to $24.4 million for fiscal 1995, which included $15.1
million of non-cash interest. This increase was attributable to an increase in
capitalized lease obligations to finance Telecom Services and Satellite Services
equipment and an increase in long-term debt, primarily the 13 1/2% Notes issued
in August 1995.
Interest income. Interest income increased $2.4 million, or
approximately 133%, from fiscal 1994. The increase is attributable to the
increase in cash from the proceeds of the issuance of the 13 1/2% Notes in
August 1995.
Provision for impairment of goodwill, investment and notes receivable.
The $7.0 million provision for impairment of goodwill, investment and notes
receivable for fiscal 1995 is a result of a $5.0 million write-down in the
goodwill associated with the acquisition of Nova-Net and a $2.0 million
allowance for an investment. The write-downs and allowance were a result of
management's estimate of the realizable value of the assets as of September 30,
1995.
Share of losses of joint venture. The Company had a 50% equity interest
in a joint venture operating the Phoenix network. Using the equity accounting
method, the Company's share of losses in the Phoenix network joint venture was
approximately $0.7 million for fiscal 1995. The Company began recording losses
from the joint venture in the second quarter of fiscal 1994. The loss from joint
venture recorded in fiscal 1994 includes $0.4 million for losses incurred prior
to fiscal 1994. Effective October 1, 1996, the Company sold its interest in the
Phoenix network joint venture.
37
Quarterly Results
The following table presents selected unaudited operating results for
three-month quarterly periods, beginning with the three-month period ended
December 31, 1994 and through the three-month period ended December 31, 1996.
The Company believes that all necessary adjustments have been included in the
amounts stated below to present fairly the quarterly results when read in
conjunction with the Company's Consolidated Financial Statements and related
notes included elsewhere in this Transition Report. Results of operations for
any particular quarter are not necessarily indicative of results of operations
for a full year or predictive of future periods. ICG's development and expansion
activities, including acquisitions, during the periods shown below materially
affect the comparability of this data from one period to another.
38
Three
Three Months Ended Three Months Ended Months
-------------------------------------------------- ---------------------------------------------- Ended
Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept.30, Dec. 31,
1994 1995 1995 1995 1995 1996 1996 1996 1996
------------ ------------ ------------ ----------- ----------- ------------------------------------------------
(Dollars in thousands)
Statementof
Operations Data:
Revenue:
Telecom services $ 5,795 7,039 9,173 10,323 13,513 17,635 24,371 32,162 34,787
Network services 15,293 13,496 14,061 15,928 15,718 13,973 14,679 15,746 15,981
Satellites
services 3,546 5,387 5,825 5,744 6,168 4,336 5,596 5,197 6,188
------------ ------------ ------------ ----------- ----------- ---------------------------------- -------------
Total revenue 24,634 25,922 29,059 31,995 35,399 35,944 44,646 53,105 56,956
Operating loss (6,664) (10,625) (12,443) (17,082) (15,258) (15,823) (20,262) (21,909) (27,051)
EBITDA (3,333) (6,849) (7,846) (12,162) (10,339) (8,381) (11,207) (12,957) (17,226)
Net loss before
cumulative effect
of change
in accounting (9,533) (13,508) (15,916) (37,691) (31,189) (26,939) (64,721) (57,805) (49,823)
Cumulative effect
of change in
accounting(1) - - - - (3,453) - - - -
------------ ------------ ------------ ----------- ----------- ---------- ----------- ----------- -------------
Net loss $ (9,533) (13,508) (15,916) (37,691) (34,642) (26,939) (64,721) (57,805) (49,823)
============ ============ ============ =========== =========== =========== =========== ============ ============
Statistical Data(2):
Telecom services:
Buildings
connected:
On-net 244 251 273 280 304 327 384 478 522
Off-net 628 777 978 1,095 1,235 1,401 1,493 1,589 1,547(3)
------------ ------------ ------------ ----------- ----------- ---------------------------------- -------------
Total buildings
connected 872 1,028 1,251 1,375 1,539 1,728 1,877 2,067 2,069
Customer
circuits in
service
(VGEs) 259,219 287,167 389,928 430,535 488,403 510,755 551,881 630,697 748,528
Switches
operational 2 6 12 13 13 13 13 14 14(4)
Switched
minutes of use
(in millions) 10 32 97 144 235 362 475 563 607
Fiber route miles(5)
Operational 424 466 579 627 637 780 886 2,143 2,385
Under construction - - - - - - - - 735
Fiber strand
miles (6)
Operational 19,049 21,811 25,264 27,150 28,779 36,310 45,098 70,067 75,490
Under
construction - - - - - - - - 33,747
Wireless miles (7) 606 606 606 568 545 582 483 491 506
Satellite services:
VSATs 682 694 687 626 633 658 659 835 860
C-Band
installations(8) - 17 25 28 33 36 48 48 54
L-Band
installations(9) - - - - - 3 53 109 204
-----------
(1) During fiscal 1996, the Company changed its method of accounting for
long-term telecom services contracts to recognize revenue as services
are provided. See "-Accounting Changes." The effect of this change in
accounting for the periods presented was not significant.
(2) Amounts presented are for three-month periods ended, or as of, the
end of the period presented.
(3) Buildings connected off-net declined from September 30, 1996 to
December 31, 1996 due to the sale of the Company's 50% interest in the
Phoenix joint venture.
(4) The switch located in Melbourne, Florida is in the process of
being relocated and is not included in the statistical data.
(5) Fiber route miles refers to the number of miles of fiber optic cable,
including leased fiber. As of December 31, 1996, the Company had 2,385
fiber route miles, of which 312 fiber route miles were leased under
operating leases. Fiber route miles under construction
39
represents fiber under construction and fiber which is expected to be
operational within six months.
(6) Fiber strand miles refers to the number of fiber route miles, including
leased fiber, along a telecommunications path multiplied by the number
of fiber strands along that path. As of December 31, 1996, the Company
had 75,490 fiber strand miles, of which 5,936 fiber strand miles were
leased under operating leases. Fiber strand miles under construction
represents fiber under construction and fiber which is expected to be
operational within six months.
(7) Wireless miles represents the total distance of the digital microwave
paths between Company transmitters which are used in the Company's
networks.
(8) C-Band installations service cruise ships, U.S. Navy vessels and
offshore oil platform installations.
(9) L-Band installations service smaller maritime installations, and both
mobile and fixed land-based units.
The Company's consolidated revenue has increased every quarter since the
first fiscal quarter of 1992, primarily due to the installation and acquisition
of new networks, the expansion of existing networks and increased services
provided over existing networks. From the third quarter of fiscal 1993 until the
sale of four teleports in the second quarter of fiscal 1996, Satellite Services
also contributed to the quarterly revenue growth.
Operating and net losses have generally increased immediately preceding and
during periods of relatively rapid network acquisition and expansion activity.
The increased quarterly losses from the first quarter of fiscal 1995 through the
quarter ended December 31, 1996 resulted from a combination of increases in
negative margin switched access services revenue and increases in personnel and
other SG&A expenses to support the acquisition and expansion of Telecom Services
networks, the implementation of the Company's switched access services strategy
and development of local telephone services.
Individual operating units may experience variability in quarter to quarter
revenue due to (i) the timing and size of contract orders, (ii) the timing of
price changes and associated impact on volume, and (iii) customer usage
patterns.
Net Operating Loss Carryforwards
As of December 31, 1996, the Company had net operating loss carryforwards
("NOLs") of approximately $171.9 million, which expire at various times in
varying amounts through 2011. However, due to the provisions of Section 382,
Section 1502 and certain other provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), the utilization of a portion of the NOLs will be
limited. In addition, the Company is also subject to certain state income tax
laws which may also limit the utilization of NOLs for state income tax purposes.
Section 382 of the Code provides annual restrictions on the use of NOLs, as
well as other tax attributes, following significant changes in ownership of a
corporation's stock, as defined in
40
the Code. Investors are cautioned that future events beyond the control of the
Company could reduce or eliminate the Company's ability to utilize the tax
benefits of its NOLs. Future ownership changes under Section 382 will require a
new Section 382 computation which could further restrict the use of the NOLs. In
addition, the Section 382 limitation could be reduced to zero if the Company
fails to satisfy the continuity of business enterprise requirement for the
two-year period following an ownership change.
Liquidity and Capital Resources
The Company's growth has been funded through a combination of equity, debt
and lease financing. As of December 31, 1996, the Company had current assets of
$449.2 million, including $392.5 million of cash, cash equivalents and
short-term investments, which exceeded current liabilities of $87.6 million,
providing working capital of $361.6 million. The Company invests excess funds in
short-term, interest-bearing investment-grade securities until such funds are
used to fund the capital investments and operating needs of the Company's
business. The Company's investment objectives are safety, liquidity and yield,
in that order.
Cash Used By Operating Activities
The Company's operating activities used $7.5 million, $43.0 million and
$47.4 million in fiscal 1994, 1995 and 1996, respectively, and $5.6 million and
$8.6 million for the three months ended December 31, 1995 and 1996,
respectively. Cash used by operations is primarily due to net losses, which are
partially offset by non-cash expenses, such as depreciation, deferred interest
expense, preferred dividends on subsidiary preferred stock and changes in
working capital items.
The Company expects to continue to generate negative cash flow from
operating activities while it emphasizes the development, construction and
expansion of its Telecom Services business. Consequently, it does not anticipate
that cash provided by operations will be sufficient to fund future expansion of
existing networks or the construction and acquisition of new networks in the
near term.
Cash Used By Investing Activities
Cash used by investing activities was $51.5 million, $71.3 million and
$131.2 million (net of $21.6 million received in connection with the sale of
certain satellite equipment, including four teleports) in fiscal 1994, 1995 and
1996, respectively, and $24.2 million (net of $21.1 million received in
connection with the aforementioned sale) and $82.3 million for the three months
ended December 31, 1995 and 1996, respectively. Cash used by investing
activities includes cash expended for the acquisition of property, equipment and
other assets of $43.2 million, $49.8 million and $120.1 million for fiscal 1994,
1995 and 1996, respectively, and $25.8 million and $58.8 million for the three
months ended December 31, 1995 and 1996, respectively. The Company will continue
to use cash in 1997 for the construction of new networks and the expansion of
existing networks. The Company acquired assets under capital leases
41
and through the issuance of debt or warrants of $11.7 million, $38.7 million and
$55.0 million in fiscal 1994, 1995 and 1996, respectively, and $0.1 million and
$19.5 million for the three months ended December 31, 1995 and 1996,
respectively. The majority of assets acquired under capital leases and through
the issuance of debt during fiscal 1995 was for the purchase and installation of
12 of the Company's 15 high capacity digital switches (one of which is located
in Phoenix and will be operational through April 1997, after which it will be
relocated). Assets acquired during the year ended September 30, 1996 under
capital leases primarily consisted of fiber optic networks included in the
Company's agreement with Southern California Edison Company ("SCE"). The Company
is required to make capital lease payments of $31.6 million, $15.6 million,
$13.9 million, $14.3 million and $17.4 million during 1997, 1998, 1999, 2000 and
2001, respectively, and $107.5 million thereafter. The Company expects to make
investments of approximately $24.2 million in 1997 in its joint venture with CSW
and estimates making additional investments therein of approximately $25.5
million through 2002. The Company is obligated to purchase all of the shares of
MTN (at fair value) that are owned by the other shareholder of MTN, if MTN has
not completed a public offering by January 3, 1998.
Cash Provided (Used) By Financing Activities
Financing activities provided $49.4 million, $377.8 million and $360.2
million in fiscal 1994, 1995 and 1996, respectively, and used $8.4 million and
$0.2 million in the three months ended December 31, 1995 and 1996, respectively.
The funds to finance the Company's business acquisitions, capital expenditures,
working capital requirements and operating losses were obtained through public
and private offerings of Holdings-Canada common shares, the 12 1/2% Notes and 14
1/4% Preferred Stock, units (the "Units") consisting of the 13 1/2% Notes and
warrants (the "Unit Warrants"), the Redeemable Preferred Stock, 8% Convertible
Subordinated Notes and 7% Convertible Subordinated Notes (together the
"Convertible Subordinated Notes") and Convertible Preferred Shares of
Holdings-Canada, capital lease financings and various working capital sources,
including credit facilities.
As of December 31, 1996, an aggregate of approximately $92.8 million of
capitalized lease obligations was due prior to December 31, 2001 and an
aggregate accreted value of approximately $685.8 million was outstanding under
the 12 1/2% Notes and 13 1/2% Notes. The 12 1/2% Notes require payments of
interest to be made in cash commencing on November 1, 2001 and mature on May 1,
2006. The 13 1/2% Notes require payments of interest to be made in cash
commencing on March 15, 2001 and mature on September 15, 2005. In addition, the
14 1/4% Preferred Stock requires payment of dividends to be made in cash
commencing August 1, 2001. As of December 31, 1996, the Company had $6.5 million
of other indebtedness that matures prior to December 31, 2001. The Company may
also have additional payment obligations prior to such time, the amount of which
cannot presently be determined. See notes 3, 8, 10 and 14 to the Consolidated
Financial Statements. The Company's cash on hand and amounts expected to be
available through vendor financing arrangements will provide sufficient funds
necessary for the Company to expand its Telecom Services business as currently
planned and to fund its operating deficits through 1997 and early 1998.
Accordingly, the Company may have to refinance a substantial amount of
indebtedness and obtain substantial additional funds prior to March 2001. The
Company's ability to do so will depend on, among other things, its financial
condition at the time, the restrictions in the instruments governing it
indebtedness, and other factors, including market conditions, beyond the control
of the Company. There can be no assurance that the Company will be able to
refinance such indebtedness, including such capitalized leases, or obtain such
additional funds, and if the Company is unable to effect such refinancings or
obtain
42
additional funds, the Company's ability to make principal and interest payments
on its indebtedness or make payments of cash dividends on, or the mandatory
redemption of, the 14 1/4% Preferred Stock, would be adversely affected.
Capital Expenditures
The Company expects to continue to generate negative cash flow from
operating activities while it emphasizes development, construction and expansion
of its business and until the Company establishes a sufficient
revenue-generating customer base. The Company's capital expenditures (including
asset acquired under capital leases and through the issuance of debt) were $54.9
million, $88.5 million and $175.1 million in fiscal 1994, 1995 and 1996,
respectively, and $25.9 million and $78.2 million for the three months ended
December 31, 1995 and 1996, respectively. The Company anticipates that the
expansion of existing networks, construction of new networks and further
development of the Company's products and services will require capital
expenditures of approximately $250.0 million and $240.0 million during 1997 and
1998, respectively, and continued significant capital expenditures thereafter.
To facilitate the expansion of its switched services strategy and entrance into
data communications, the Company has entered into equipment purchase agreements
with various vendors under which the Company must purchase a substantial amount
of equipment and other assets, including a full range of switching systems,
fiber optic cable, network electronics, software and services. Actual capital
expenditures will depend on numerous factors, including certain factors beyond
the Company's control. These factors include the nature of future expansion and
acquisition opportunities, economic conditions, competition, regulatory
developments and the availability of equity, debt and lease financing.
General
The Company's operations have required and will continue to require
significant capital expenditures for development, construction, expansion and
acquisitions. Significant amounts of capital are required to be invested before
revenue is generated, which results in initial negative cash flow.
In view of the anticipated negative cash flow from operating activities,
the continuing development of the Company's products and services, the expansion
of existing networks and the construction, leasing and licensing of new
networks, the Company will require additional amounts of cash in the future from
outside sources. Management believes that the Company's cash on hand and amounts
expected to be available through vendor financing arrangements will provide
sufficient funds necessary for the Company to expand its Telecom Services
business as currently planned and to fund its operating deficits through 1997
and early 1998. Additional sources of cash may include public and private equity
and debt financings, sales of non-strategic assets, capitalized leases and other
financing arrangements. The Company may require additional amounts of equity
capital in the near term. In the past, the Company has been able to secure
sufficient amounts of financing to meet its capital expenditure needs. There can
be no assurance that additional financing will be available to the Company or,
if available, that it can be obtained on terms acceptable to the Company.
The failure to obtain sufficient amounts of financing could result in the
delay or
43
abandonment of some or all of the Company's development and expansion plans,
which could have a material adverse effect of the Company's business. In
addition, the inability to fund operating deficits with the proceeds of
financings until the Company establishes a sufficient revenue generating
customer base could have a material adverse effect on the Company's liquidity.
Accounting Changes
During fiscal 1996, the Company changed its method of accounting for
long-term telecom services contracts. Under the new method, the Company
recognizes revenue as services are provided and continues to charge direct
selling expenses to operations as incurred. The Company had previously
recognized revenue in an amount equal to the noncancelable portion of the
contract, which is a minimum of one year on a three-year or longer contract, at
the inception of the contract and upon activation of service to the customer, to
the extent of direct installation and selling expense incurred in obtaining
customers during the period in which such revenue was recognized. Revenue
recognized in excess of normal monthly billings during the year was limited to
an amount which did not exceed such installation and selling expense. The
remaining revenue from the contract had been recognized ratably over the
remaining noncancelable portion of the contract. The Company believes the new
method is preferable because it provides a better matching of revenue and
related operating expenses and is more consistent with accounting practices
within the telecommunications industry.
As required by generally accepted accounting principles, the Company
has reflected the effects of the change in accounting as if such change had been
adopted as of October 1, 1995. The Company's results for fiscal 1996 include a
charge of $3.5 million ($0.13 per share) relating to the cumulative effect of
this change in accounting as of October 1, 1995. The effect of this change in
accounting was not significant for fiscal 1996. If the new revenue recognition
method had been applied retroactively, Telecom Services revenue would have
decreased by $0.5 million and $0.7 million for fiscal 1994 and 1995,
respectively. See the Company's Consolidated Financial Statements and the
related notes thereto contained elsewhere in this Transition Report.
In addition, the Company has shortened the estimated depreciable lives
for substantially all of its fixed assets. These estimates were changed to
better reflect the estimated periods during which these assets will remain in
service and result in useful lives which are more consistent with industry
practice. The changes in estimates of depreciable lives have been made on a
prospective basis, beginning January 1, 1996. This change in estimate increased
depreciation expense during fiscal year 1996 by approximately $7.0 million
($0.26 per share). The change would have had an estimated annual effect of
approximately $9.0 million had the change been in effect for the entire year.
Deferred tax liability has been adjusted for the effect of this change in
estimated depreciable lives, which resulted in an income tax benefit of $5.3
million in fiscal 1996.
44
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company appear on page F-1 of
this Transition Report. The financial statement schedule required under
Regulation S-X is filed pursuant to Item 14 of this Transition Report, and
appears on page S-1 of this Transition Report.
Selected quarterly financial data required under this Item is included
under Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
45
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
ICG's corporate charter provides that Directors serve staggered
three-year terms. The Directors of ICG will hold office until the designated
annual meeting of stockholders and until their successors have been elected and
qualified or until their death, resignation or removal.
There are currently four committees of the Board of Directors of ICG:
Executive Committee, Audit Committee, Compensation Committee and Stock Option
Committee. The Executive Committee provides Board oversight for the operations
of the Company between Board meetings. The Audit Committee reviews the services
provided by the Company's independent auditors, consults with the independent
auditors on audits and proposed audits of the Company, reviews certain filings
with the Securities and Exchange Commission and various internal auditing
procedures and the adequacy of internal controls. The Compensation Committee
determines compensation for most executives and reviews transactions, if any,
with affiliates. The Stock Option Committee determines stock option awards. The
officers of ICG are elected by the Board of Directors and hold office until
their successors are chosen and qualified or until their death, resignation or
removal.
Set forth below are the names, ages and positions of Directors and
executive officers of ICG.
Name Age Position
- ---------------------------------- ------ --------------------------------------
William J. Laggett(3)(4)(5)(6)(7) 66 Chairman of the Board of Directors
J. Shelby Bryan (3)(4)(5)(6) 50 President, Chief Executive Officer
and Director
Douglas I. Falk 47 Executive Vice President-Satellite
and President of ICG
Satellite Services, Inc.
James D. Grenfell 44 Executive Vice President, Chief
Financial Officer and Treasurer
Mark S. Helwege 46 Executive Vice President-Network and
President of FOTI
Marc E. Maassen 45 Executive Vice President
William J. Maxwell 54 Executive Vice President-Telecom and
President of ICG Telecom Group, Inc.
Harry R. Herbst (1)(4)(7) 45 Director
Stan McLelland(2)(5)(7) 51 Director
Jay E. Ricks (1)(5)(6) 64 Director
Leontis Teryazos (2)(7) 54 Director
(1) Term expires at annual meeting of stockholders in 1997.
(2) Term expires at annual meeting of stockholders in 1998.
(3) Term expires at annual meeting of stockholders in 1999.
(4) Member of Audit Committee.
46
(5) Member of Compensation Committee.
(6) Member of Executive Committee.
(7) Member of Stock Option Committee.
Executive Officers of ICG
William J. Laggett has been Chairman of the Board of Directors since June 1995
and a Director since January 1995. Mr. Laggett was the President of Centel
Cellular Company from 1988 until his retirement in 1993. From 1970 to 1988, Mr.
Laggett held a variety of management positions with Centel Corporation,
including Group Vice President-Products Group, President-Centel Services, and
Senior Vice President-Centel Corporation. Prior to joining Centel, Mr. Laggett
worked for New York Telephone Company .
J. Shelby Bryan was appointed President, Chief Executive Officer and a Director
in May 1995. He has 17 years of experience in the telecommunications industry,
primarily in the cellular business. He co-founded Millicom International
Cellular S.A. ("Millicom"), a publicly owned corporation providing international
cellular service, served as it President and Chief Executive Officer from 1985
to 1994 and has served as a Director through the present.
Douglas I. Falk has been President of ICG Satellite Services, Inc. since August
1996 and Executive Vice President - Satellite of ICG since October 1996. Prior
to joining the Company, Mr. Falk held several positions in the cruise line
industry, including President of Norwegian Cruise Line, Senior Vice President -
Marketing and Sales with Holland America Lines/Westours and Executive Vice
President of Royal Viking Line. Prior to his work in the cruise line industry,
Mr. Falk held executive positions with MTI Vacations, Brown and Williamson
Tobacco, Pepsico International, Glendenning Associates and The Procter and
Gamble Company.
James D. Grenfell joined the Company as Executive Vice President, Chief
Financial Officer and Treasurer in November 1995. Previously, Mr. Grenfell
served as Director of Financial Planning for BellSouth Corporation and Vice
President and Assistant Treasurer of BellSouth Capital Funding. A Chartered
Financial Analyst, Mr. Grenfell has been a telephone industry financial
executive for over 15 years. He was with BellSouth from 1985 through November
1996, serving previously as Finance Manager of Mergers and Acquisitions. He
handled BellSouth's financing strategies, including capital market financings as
well as public debt and banking relationships. Prior to BellSouth, Mr. Grenfell
spent two years as a Project Manager with Utility Financial Services and six
years with GTE of the South, a subsidiary of GTE Corporation, including four
years as Assistant Treasurer.
Mark S. Helwege has been Executive Vice President - Network of ICG and President
of Fiber Optic Technologies, Inc. since August 1996. Prior to joining the
Company, Mr. Helwege was Director of Service Marketing Support for Technology
Service Solutions. From 1986 to 1995, Mr. Helwege held various senior management
roles, including Vice President of Sales, and President and Chief Executive
Officer with Intelogic Trace. Mr. Helwege also has held various management
positions with the Computer Services Division of General Electric, General
Datacomm Industries and Western Union Telegraph Company.
47
Marc E. Maassen has been Executive Vice President since August 1996. Prior to
this position, Mr. Maassen was Executive Vice President - Network of ICG
beginning in October 1995, and President of Fiber Optic Technologies, Inc. in
April 1995. Mr. Maassen joined the Company in 1991 as Vice President of Sales
and Marketing. Prior to joining the Company, Mr. Maassen held senior sales
management positions at TelWatch, Inc., an integrated network management
software company. Mr. Maassen previously worked for First Interstate as Director
of Telecom and for AT&T Information Systems as an Account Executive and U S WEST
as a Major Accounts Manager.
William J. Maxwell has been Executive Vice President - Telecom of ICG since
October 1995, and President of ICG Telecom Group, Inc. since December 1992.
Prior to joining the Company, Mr. Maxwell was the senior marketing executive of
WilTel Inc., a full service telecommunications company. Mr. Maxwell, who has
over 25 years of general management and financial experience, also served as
President and Chief Executive Officer of MidAmerican Communications Corporation
in Omaha, Nebraska from November 1987 to June 1991.
Directors of ICG
Harry R. Herbst has been a Director since October 1995 and has been Vice
President of Finance and Strategic Planning of Gulf Canada Resources Ltd. since
November 1995 and Vice President and Treasurer of Gulf Canada Resources Ltd.
from January to November 1995. Previously, Mr. Herbst was Vice President of
Taxation for Torch Energy Advisors Inc. from 1991 to 1994, and tax manager for
Apache Corp. from 1987 to 1990. Mr. Herbst is a certified public accountant,
formerly with Coopers & Lybrand.
Stan McLelland has been a Director since October 1996 and is Executive Vice
President and General Counsel of Valero Energy Corporation in San Antonio,
Texas. McLelland also served on the Board of Directors of Valero Natural Gas
Partners, L.P., a publicly owned limited partnership traded on the New York
Stock Exchange, from 1987 to 1994. Mr. McLelland was previously associated with
the law firm of Baker & Botts in Houston and in the private practice of law in
Austin specializing in oil and gas litigation.
Jay E. Ricks has been a Director since March 1993. Mr. Ricks is Chairman of
Douglas Communications Corp. ("DCC"), a privately held cable television company.
Mr. Ricks is a director of Data Transmission Network Corporation, a publicly
owned data distribution company and a director of the licensee of KBTX-TV in
Bryan, Texas, and KWTX-TV in Waco, Texas. Mr. Ricks is also a director and
shareholder of SkyConnect, Inc. Mr. Ricks specialized in the communications law
practice with the Washington, D.C. law firm of Hogan & Hartson from 1962 until
1990.
Leontis Teryazos has been a Director since June 1995. Mr. Teryazos, a Canadian
resident, has headed Letmic Management Inc., a financial consulting firm, since
1993, and Letmic Management Reg'd., a real estate development and management
company, since 1985.
48
Directors and Executive Officers of Holdings-Canada and Holdings
The Directors and executive officers of each of Holdings-Canada and
Holdings are set forth below. Biographical information regarding each individual
is set forth above (except as to Mr. Gregory C.K. Smith, whose biographical
information appears below).
Holdings-Canada
The Directors of Holdings-Canada are:
William J. Laggett (Chairman)
J. Shelby Bryan
Harry R. Herbst
Jay E. Ricks
Gregory C.K. Smith
Leontis Teryazos
The executive officers of Holdings-Canada are:
J. Shelby Bryan - President and Chief Executive Officer
Douglas I. Falk - Executive Vice President - Satellite
James D. Grenfell - Executive Vice President, CFO and Treasurer
Mark S. Helwege - Executive Vice President - Network
Marc E. Maassen - Executive Vice President
William J. Maxwell - Executive Vice President - Telecom
Gregory C.K. Smith, 38, has been a Director of Holdings-Canada since April
1994. Mr. Smith, a lawyer, is a partner of Tupper Jonsson & Yeadon in Vancouver,
British Columbia. Mr. Smith was an associate employed by Tupper Jonsson & Yeadon
from June 1986 until he joined the partnership in April 1991.
49
Holdings
The Directors of Holdings are:
J. Shelby Bryan
James D. Grenfell
Mark S. Helwege
William J. Maxwell
The executive officers of Holdings are:
J. Shelby Bryan - President and Chief Executive Officer
Douglas I. Falk - Executive Vice President - Satellite
James D. Grenfell - Executive Vice President, CFO and Treasurer
Mark S. Helwege - Executive Vice President - Network
Marc E. Maassen - Executive Vice President
William J. Maxwell - Executive Vice President - Telecom
Compliance With Section 16(a)of the Exchange Act
The following table lists the Directors, officers, beneficial owners of
more than 10% of the outstanding Common Stock (each a "Reporting Person") that
failed to file on a timely basis reports required by Section 16(a) of the
Exchange Act during the most recent fiscal year, the number of late reports, the
number of transactions that were not reported on a timely basis, and any known
failure to file a required Form by each Reporting Person.
Known Failures
Reporting Person Late Reports Transactions to File Required
Untimely Reported Forms
- ------------------------ -------------- ------------------ --------------------
William W. Becker (1) 2 (Form 4) 14 3
Harry R. Herbst 1 (Form 4) 1 None
William J. Laggett 1 (Form 4) 1 None
Marc E. Maassen 1 (Form 4) 1 None
Jay E. Ricks 2 (Form 4) 2 None
Robert Swenarchuk (1) 1 (Form 4) 1 None
- ----------
(1) Former Director.
50
ITEM 11. EXECUTIVE COMPENSATION
Director Compensation
ICG compensates its non-employee directors $250 for telephonic meetings
and $2,500 for each directors' meeting or committee meeting attended, plus
reimbursement of expenses. In addition, the Chairman of the Board receives an
annual fee of $80,000 payable in quarterly installments. In fiscal 1996, all
non-employee directors of ICG were granted options to purchase 20,000 shares of
Common Stock under ICG's 1996 Stock Option Plan, and during the stub period from
October 1, 1996 through December 31, 1996, all non-employee directors of ICG
were granted options to purchase 5,000 shares of Common Stock under such Plan.
On January 1, 1997, all non-employee directors of ICG were granted options to
purchase 20,000 shares of Common Stock under ICG's 1996 Stock Option Plan, which
will vest as to 5,000 shares at the end of each fiscal quarter. All non-employee
directors are given the option to receive shares of ICG Common Stock in lieu of
their cash fees.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee presently consists of J. Shelby Bryan, the
President and Chief Executive Officer, William J. Laggett, the Chairman of the
Board of Directors, Stan McLelland, Director, and Jay E. Ricks, Director.
Executive Compensation
The following table provides certain summary information concerning
compensation paid or accrued by the Company and its subsidiaries, to or on
behalf of J. Shelby Bryan, the Company's President and Chief Executive Officer,
and the four other most highly compensated executive officers for the fiscal
years ended September 30, 1996, 1995 and 1994, and one additional officer for
whom disclosure would have been required but for the fact that the individual
was not serving as executive officer at September 30, 1996 (the "Named
Officers"). The Company has not maintained any long-term incentive plans and the
Company has not granted stock appreciation rights.
51
Summary Compensation Table
Annual Compensation Long-term
- ---------------------- ------- -------------------- ------------Compensation
Securities
Name and Principal Fiscal Salary Bonus Other Annual Underlying
Position Year ($) ($) Compensation Options
- --------------------- -------- ----------- ------- ----------- ------------
J. Shelby Bryan 1996 221,196 (1) - 35,491 (2) 450,000
President and Chief 1995 30,728 - - 1,550,000
Executive Officer 1994 - - - -
James D. Grenfell 1996 148,526 46,665 138,435 (4) 50,000
Executive Vice President, 1995 - - - -
CFO and Treasurer 1994 - - - -
Marc E. Maassen 1996 147,092 22,500 25,341 (6) 40,000
Executive Vice President 1995 131,933 60,000 9,291 (3) 15,000
1994 105,100 23,375 6,290 (3) -
William J. Maxwell 1996 222,917 117,160 18,632 (7) 75,000
Executive Vice 1995 205,475 75,000 8,288 (3) 75,000
President-Telecom and 1994 179,850 100,000 9,250 (3) -
President ICG Telecom Group,
Inc.
John R. Evans(8) 1996 33,205 - 361,311 (9) -
Former Vice President, 1995 169,850 43,750 12,008 (3) 40,000
Treasurer and CFO 1994 121,600 70,000 9,240 (3) -
John D. Field (10) 1996 295,000 50,000 27,857(11) 75,000
Former Executive Vice 1995 66,667 110,000 3,000 (3) -
President and Secretary 1994 - - - -
(1) Consists of $221,196 earned pursuant to the compensation formula in Mr.
Bryan's employment agreement.
(2) Consists of $25,991 for car allowance and ICG's contributions to 401(k)
Defined Contribution Plan in the amount of $9,500.
(3) Consists of ICG's contributions to 401(k) Defined Contribution Plan.
(4) Consists of relocation expenses in the amount of $117,295, car allowance of
$11,640 and ICG's contributions to 401(k) Defined Contribution Plan in the
amount of $9,500.
(5) Consists of compensation earned as the former Executive Vice
President-Network, President of FOTI and former Vice President of Mergers
and Acquisitions of ICG.
(6) Consists of $16,428 for car allowance and ICG's contributions to 401(k)
Defined Contribution Plan in the amount of $8,913.
(7) Consists of $9,200 for car allowance and ICG's contributions to 401(k)
Defined Contribution Plan in the amount of $9,432.
(8) Mr. Evans is the former Vice President, Treasurer and Chief Financial
Officer of Holdings-Canada, whose employment terminated in November 1995.
(9) Consists of $600 for car allowance, $8,401 accrued vacation, $350,000
severance payment and ICG's contributions to 401(k) Defined Contribution
Plan in the amount of $2,310.
(10) Mr. Field is the former Executive Vice President and Secretary of ICG,
Holdings-Canada and Holdings, whose employment terminated in November 1996.
(11) Consists of $15,586 for car allowance and ICG's contributions to 401(k)
Defined Contribution Plan in the amount of $12,271.
52
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End
Option Values
The following table provides information on options exercised during
fiscal 1996 by the Named Officers and the value of such officers' unexercised
options at the end of the last fiscal year:
Number of Securities Value of Unexercised In-the-
Underlying Unexercised Options Money Options at Fiscal Year
at Fiscal Year End End(1) (2)
-------------------------------- -------------------------------
Number of Shares
Acquired on Value Exercis- Unexercis- Exercis- Unexercis-
Name Exercise Realized able able able able
- --------- ------------ ----------- ---------- --------- -------- ----------
J. Shelby
Bryan - $ - 1,220,000 780,000 $15,936,250 $9,260,625
James D.
Grenfell - - 0 50,000 0 550,000
Marc E.
Maassen 11,000 246,174 21,000 54,000 176,190 557,460
William J.
Maxwell - - 197,000 153,000 2,433,790 1,483,260
John R.
Evans 64,000 200,173 0 0 0 0
John D.
Field - - 0 28,750 0 316,250
(1) Based on the closing price of $21.00 per share of Common Stock on September
30, 1996, on the American Stock Exchange.
(2) Options granted prior to fiscal 1994 contained exercise prices stated in
Canadian dollars; value listed based on an exchange rate of 1.3699.
Option/SAR Grants in Last Fiscal Year
The following table provides information on option grants during fiscal 1996 to
the Named Officers:
Potential Realized
Value at Assumed
Annual Rates of
Stock Price
Appreciation
Individual Grants for Option Term
----------------------- -------------------
Percent
of Total
Number of Options
Securities Granted to Exercise
Underlying Employees in Price Expiration
Name Options Granted Fiscal Year ($/sh) Date 5% ($) 10% ($)
- ---------- --------------- ------------ -------- ---------- --------- --------
J. Shelby
Bryan 450,000 33.9 $10.00 11/13/2005 $2,830,500 $7,173,000
James D.
Grenfell 50,000 3.8 10.00 11/13/2005 314,500 797,000
Marc E.
Maassen 40,000 3.0 10.00 11/13/2005 251,600 637,600
William J.
Maxwell 75,000 5.7 10.00 11/13/2005 471,750 1,195,500
John R.
Evans 0 - - - - -
John D.
Field 75,000 (1) 5.7 10.00 11/13/2005 471,750 1,195,500
(1) 46,250 options have been canceled as a result of Mr. Field's resignation on
November 5, 1996.
Executive Employment Contracts
The Company has employment agreements with Messrs. J. Shelby Bryan, Douglas
I. Falk, James D. Grenfell, Mark S. Helwege and William J. Maxwell.
53
The Company's employment agreement with Mr. Bryan provides for an
initial term of two years, which commenced May 30, 1995 and which may be
continued for one year at the option of Mr. Bryan. As compensation, the Company
will pay Mr. Bryan a salary equal to the sum of one percent of the monthly
increase in Company revenue and three percent of the monthly increase in EBITDA,
offset in any month where one component is a negative amount to not less than
zero. If Mr. Bryan's salary exceeds $1,500,000 in any fiscal year, the Company
may elect to pay such excess in unregistered Common Stock. Mr. Bryan is entitled
to benefits as are generally provided to executive officers of ICG, including
options under stock option plans, a leased automobile, private club membership
fees and reimbursement of reasonable out-of-pocket expenses incurred on behalf
of the Company. The employment agreement may be terminated by the Company with
or without cause or after a disability continuing for a six-month consecutive
period, or by Mr. Bryan for cause, including breach of the agreement or
reduction in status or responsibilities, or change of control. If the employment
agreement is terminated for any reason other than for cause, the Company is
obligated to pay Mr. Bryan a lump sum of $2.5 million and to continue benefits
for a period equal to the greater of the remainder of the employment term or
eighteen months. After termination of the employment agreement, Mr. Bryan is
subject to a confidentiality covenant and a one-year non-competition commitment.
The Company's employment agreement with Mr. Falk, dated August 14,
1996, has an initial one-year term commencing August 26, 1996 and continues from
month to month thereafter until either party provides 30 days notice of
termination. The agreement provides for an annual base salary and an incentive
bonus determined by the Board of Directors. Mr. Falk also receives stock options
under the stock option plans. If the Company terminates the employment agreement
without cause or if the Company or Mr. Falk terminates the employment agreement
upon the occurrence of a major transaction involving the Company, then Mr. Falk
will receive his salary and insurance benefits for a period of 12 months
following the date of termination. Mr. Falk is subject to a confidentiality
covenant and to a one-year non-competition commitment following the termination
of his employment.
The Company's employment agreement with Mr. Grenfell provides for an
initial two-year term which commenced November 1, 1995. Upon completion of the
first 12 months of the initial term, the agreement automatically renews from
month-to-month such that 12 months remain in the term. The agreement may be
terminated upon 30 days written notice from either party or by the Company if
Mr. Grenfell is unable to perform his duties for 140 days in any 180-day period
due to illness or incapacity. Mr. Grenfell is entitled to such other benefits as
are generally provided to executive officers of the Company, including options
under the Company's stock option plans, use of a company car and reimbursement
or direct payment of reasonable out-of-pocket expenses incurred on behalf of the
Company. The agreement provides for an annual base salary and an incentive bonus
determined by the Board of Directors. If the employment agreement is terminated
without cause by the Company or by either party upon the occurrence of a change
of control involving the Company, Mr. Grenfell will receive a termination fee
equal to his current monthly salary times the number of months remaining in the
term. Mr. Grenfell is also subject to a ten-year confidentiality covenant and a
one-year non-competition commitment.
The Company's employment agreement with Mr. Helwege, dated July 8,
1996, has an initial one-year term commencing August 1, 1996 and renews
automatically thereafter until either
54
party provides 30 days notice of termination. The agreement provides for an
annual base salary and an incentive bonus determined by the Board of Directors.
Mr. Helwege also receives stock options under the stock option plans. The
Company may terminate the employment agreement for any reason upon 30 days
notice. If the Company terminates the employment agreement without cause or if
the Company or Mr. Helwege terminates the employment agreement upon the
occurrence of a major transaction involving the Company, then Mr. Helwege will
receive his salary and insurance benefits for a period of 12 months following
the date of termination. Mr. Helwege is subject to a confidentiality covenant
and to a one-year non-competition commitment following the termination of his
employment.
The Company's employment agreement with Mr. Maxwell, dated December 1,
1992, has an initial five-year term and thereafter one-year terms until either
party provides 30 days notice of termination prior to the end of a term. The
agreement provides for an annual base salary and an incentive bonus determined
by the Board of Directors. Mr. Maxwell also receives stock options under the
stock option plans. If the Company terminates the employment agreement without
cause or if the Company or Mr. Maxwell terminates the employment agreement upon
the occurrence of a major transaction involving the Company, then Mr. Maxwell
shall receive his salary for the lesser of one year or until the expiration of
the current employment term. Mr. Maxwell is subject to a confidentiality
covenant and to a one-year non-competition commitment following the termination
of his employment.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of January 31, 1997, the number of
shares of Common Stock of ICG owned by (i) each Named Officer and Director, (ii)
all executive officers and Directors as a group, and (iii) each person who owned
of record, or was known to own beneficially, more than 5% of the outstanding
shares of Common Stock. The persons named in the table below have sole voting
and investment power with respect to all of the shares of Common Stock owned by
them, unless otherwise noted.
55
Amount/Nature of
Name and Address of Beneficial Owner Beneficial Ownership Percent (1)
- -------------------------------------- --------------------- -----------------
Montgomery Asset Management, L.P. 3,148,328 10.1%
101 California Street
San Francisco, CA 94111
Franklin Advisers, Inc. 2,436,500 (2) 7.8%
777 Mariners Island Boulevard
San Mateo, CA 94404
LGT Asset Management, Inc. 2,055,100 (3) 6.6%
50 California Street
San Francisco, CA 94111
William W. Becker 1,837,198 (2) 5.9%
West Bay Road
Georgetown, Cayman Island
Denver Investment Advisors, LLC 1,784,700 5.7%
1225 17th Street, 26th Floor
Denver, CO 80202
Ardsley Advisory Partners 1,630,000 (5) 5.2%
646 Steamboat Road
Greenwich, CT 06836
Morgan Stanley Group Inc. 1,621,651 (6) 5.2%
1585 Broadway
New York, NY 10036
Peter Wightman 1,592,200 (7) 5.1%
19 Vectis Court
Southampton, U.K. S01 7LY
William J. Laggett 55,297 (8) *
Chairman of the Board of Directors
of ICG
J. Shelby Bryan 1,665,470 (9) 5.3%
President, Chief Executive Officer and
Director of ICG, Holdings-Canada and
Holdings
Douglas I. Falk 475 *
Executive Vice President-Satellite of ICG,
Holdings-Canada and Holdings, and President
of ICG Satellite Services
James D. Grenfell 12,846 (10) *
Executive Vice President, Chief Financial
Officer and Treasurer of ICG, Holdings-Canada
and Holdings, and Director of
Holdings
Mark S. Helwege 0 *
Executive Vice President-Network of ICG,
Holdings-Canada and Holdings,
President of FOTI and
Director of Holdings
56
Amount/Nature of
Name and Adress of Beneficial Owner Beneficial Ownership Percent (1)
- --------------------------------------------------------------------------------
Marc E. Maassen 33,626 (11) *
Executive Vice President of ICG,
Holdings-Canada and Holdings
William J. Maxwell 240,987 (9) *
Executive Vice President-Telecom
of ICG, Holdings-Canada, and Holdings,
President of ICG Telecom Group, Inc.
and Director of Holdings
Harry R. Herbst 30,934 (8) *
Director of ICG
Stan McLelland 9,400(13) *
Director of ICG
Jay E. Ricks 82,180(14) *
Director of ICG
Leontis Teryazos 45,000 (8) *
Director of ICG
John R. Evans 0 *
Former Vice President, Treasurer
and Chief Financial Officer of
Holdings-Canada
John D. Field 19,750 (15) *
Former Executive Vice President and
Secretary of ICG,
Holdings-Canada and Holdings
All executive officers and Directors as
a group (11 persons) 2,176,215 (16) 7.0%
- ------------------
*Less than one percent of ICG's outstanding shares of Common Stock.
(1) Based on 31,270,523 issued and outstanding shares of Common Stock on
January 31, 1997, plus shares of Common Stock which may be acquired by the
person or group indicated pursuant to any options and warrants exercisable,
or pursuant to any shares vesting under the Company's 401(k) Plan, within
60 days.
(2) Franklin Advisers, Inc. has reported on Schedule 13G that its parent
holding company, Franklin Resources, Inc. ("FRI"), and Charles B. Johnson
and Rupert H. Johnson, Jr., principal shareholders of FRI, benefically own
the shares of Common Stock reflected in this table.
(3) LGT Asset Management, Inc. has reported on Schedule 13G that its
subsidiaries, Chancellor LGT Asset Management, Inc.("CLAMI") and
Chancellor LGT Trust Company ("CLTC"), beneficially own the shares of
Common Stock reflected in this table and that CLAMI and CLTC have sole
power to dispose or direct the disposition of, all of such shares.
(4) Includes 1,404,078 shares of Common Stock and options to purchase 433,120
shares of Common Stock held directly by William W. Becker.
(5) Ardsley Advisory Partners ("Ardsley") has reported on Schedule 13G that
its managing partner, Philip J. Hempleman, beneficially owns the shares
of Common Stock reflected in this table and that Ardsley and Mr Hempleman
may be deemed to have the shares power to dispose or direct the disposition
of,all of such shares.
57
(6) Includes 319,706 shares of Common Stock held by Morgan Stanley Group, Inc.,
801,945 shares of Common Stock held by PG Investors Inc. ("PGI"), an
affiliate of Morgan Stanley Group, Inc., and 500,000 shares of Common Stock
which may be acquired by PGI pursuant to the exercise of outstanding
warrants.
(7) Includes 1,300,000 shares of Common Stock held by Martin Holdings Ltd. of
which Peter Wightman is chairman and sole shareholder, and 292,200 shares
of Common Stock held by Hartford Holdings, Inc. Ltd., of which Mr. Wightman
is also chairman and sole shareholder.
(8) Represents shares of Common Stock which may be acquired pursuant to the
exercise of outstanding stock options.
(9) Includes 2,000 shares of Common Stock held in Mr. Bryan's spouse's name for
which Mr. Bryan disclaims beneficial ownership, 970 shares of Common Stock
held by a 401(k) Plan pursuant to contribution of shares to the Plan by the
Company and 1,662,500 shares of Common Stock which may be acquired pursuant
to the exercise of outstanding options.
(10) Includes 346 shares of Common Stock held by a 401(k) Plan pursuant to
contribution of shares to the Plan by the Company and 12,500 shares of
Common Stock which may be acquired pursuant to the exercise of outstanding
stock options.
(11) Includes 2,626 shares of Common Stock held by a 401(k) Plan pursuant to
contribution of shares to the Plan by the Company and 31,000 shares of
Common Stock which may be acquired pursuant to the exercise of outstanding
stock options.
(12) Includes 17,000 shares of Common Stock held jointly with Mr. Maxwell's
spouse, 3,800 shares of Common Stock held in Mr. Maxwell's spouse's name
for which Mr. Maxwell disclaims beneficial ownership, 4,437 shares of
Common Stock held by a 401(k) Plan pursuant to a contribution of shares of
Common Stock to the Plan by the Company, and 215,750 shares of Common Stock
which may be acquired pursuant to the exercise of outstanding stock
options.
(13) Includes 5,000 shares of Common Stock which may be acquired pursuant to the
exercise of outstanding stock options.
(14) Includes 2,000 shares of Common Stock held directly by Mr. Ricks and 80,180
shares of Common Stock which may be acquired pursuant to the exercise of
outstanding stock options.
(15) Includes 1,000 shares of Common Stock held jointly with Mr. Field's spouse
and 18,750 shares of Common Stock which may be acquired pursuant to the
exercise of outstanding stock options.
(16) As a group, executive officers and Directors beneficially own 2,119,411
shares of Common Stock through stock options which are presently
exercisable or which will become exercisable within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
To facilitate the acquisition of certain competitive access networks
and satellite services businesses which held common carrier radio licenses
subject to foreign ownership restrictions, the common carrier licenses used by
the Company's teleports and the wireless competitive access networks are
controlled by Teleport Transmissions Holdings Inc. ("TTH"), a corporation owned
33% each by U.S. Directors William Laggett and Jay Ricks, and a former Director.
TTH's subsidiaries have given 15-year promissory notes to ICG to acquire FCC
licenses. As a result of the Plan of Arrangement, the Company is reviewing the
possibility of exercising its option to have the common carrier licenses
transferred back to the Company. In the event that the Company meets the
requirements imposed by the FCC, or receives appropriate waivers, upon
completion of the transfer of the licenses the promissory notes will be canceled
and TTH and its subsidiaries will be dissolved. In fiscal 1996 and the three
months ended December 31, 1996, the Company paid or accrued $2.4 million and
$0.6 million, respectively, to TTH's subsidiaries for common carrier services,
and ICG received from TTH's subsidiaries $1.9 million and $0.4 million,
respectively, as payments on the promissory notes, management services,
equipment leases and technical support. In addition, $1.1 million of the note
balances were canceled in fiscal 1996 due to the sale of the licenses in
conjunction with the sale of four of the Company's teleports. See
"Business-Regulation."
Holdings-Canada and International Communications Consulting, Inc.
("ICC") have entered into a three-year consulting agreement whereby ICC will
provide various consulting services to the Company through December 1999 in
exchange for approximately $4.2 million in consulting fees to be paid during the
term of the agreement. During fiscal 1996 and the three months ended December
31, 1996, the Company paid $1.3 million and $0.3 million, respectively, related
to this consulting agreement. William W. Becker is President and Chief Executive
Officer of ICC.
As part of a resolution and settlement of certain transactions in 1995
between the Company and the Becker Group of Companies (the "Becker Group"), a
company founded by William W. Becker, a former Director of the Company, the
Company was assigned a note receivable in the amount of $200,000, which had
previously been advanced to John D. Field, a former executive officer of the
Company, by the Becker Group. The note receivable is evidenced by a
promissory note from Mr. Field to the Company payable on demand, which bears
interest at a rate of 7% per annum. Interest is payable annually.
In order to facilitate the relocation of William J. Maxwell, the
Company advanced $200,000 to Mr. Maxwell in April 1994 pursuant to a promissory
note payable on demand, which bears interest at a rate of 7% per annum.
59
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORT ON FORM 8-K
(A) (1) Financial Statements. The following financial statements are
included in Item 8 of Part II:
Page
-----
Independent Auditors' Report F-2
Consolidated Balance Sheets, September 30, 1995 and 1996,
and December 31,1996 F-3
Consolidated Statements of Operations, Years Ended September
30, 1994, 1995 and 1996, and the Three Months Ended
December 31, 1995 (unaudited) and 1996 F-5
Consolidated Statements of Stockholders' Equity (Deficit),
Years Ended September 30, 1994, 1995 and 1996, and the
Three Months Ended December 31, 1996 F-7
Consolidated Statements of Cash Flows, Years Ended September
30, 1994, 1995 and 1996, and the Three Months Ended
December 31, 1995 (unaudited) and 1996 F-9
Notes to Consolidated Financial Statements, September 30,
1995 and 1996, and December 31, 1996 F-12
(2) Financial Statement Schedule. The following Financial Statement
Schedule is submitted herewith:
Independent Auditors' Report S-2
Schedule II: Valuation and Qualifying Accounts S-3
(3) List of Exhibits.
(2) Plan of Acquisition, Reorganization, Arrangement, Liquidation or
SuccessionPlan of Acquisition, Reorganization, Arrangement,
Liquidation or Succession.
2.1: Plan of Arrangement under Section 192 of the Canada Business
Corporations Act. [Incorporated by reference to Exhibit 2.1
to Registration Statement on Form S-4 of ICG Communications,
Inc. (Commission File No. 333-4226)].
(3) Corporate Organization.
3.1: Memorandum and Articles of IntelCom Group Inc., as amended,
filed with the Registrar of Companies, Province of British
Columbia, Canada [Incorporated by reference to IntelCom
Group Inc.'s Annual Report on Form 20-F for the year ended
September 30, 1992].
60
3.2: Altered Memorandum and Articles of IntelCom Group Inc., as
amended by Special Resolution passed October 7, 1994, filed
with the Registrar of Companies, Province of British
Columbia, Canada [Incorporated by reference to IntelCom
Group Inc.'s Annual Report on Form 10-K for the year ended
September 30, 1994].
3.3: Certificate of Incorporation, as amended, from the Registrar
of Companies, Province of British Columbia, Canada
[Incorporated by reference to IntelCom Group Inc.'s Annual
Report on Form 20-F for the year ended September 30, 1992].
3.4: Certificate of Change of Name (under the B.C. Act) from the
Registrar of Companies, Province of British Columbia, Canada
[Incorporated by reference to IntelCom Group Inc.'s Annual
Report on Form 20-F for the year ended September 30, 1993,
as filed on September 30, 1994].
3.5: Certificate of Continuance from Industry Canada, dated
October 30, 1995. [Incorporated by reference to Exhibit 3.5
to IntelCom Group Inc.'s Annual Report on Form 10-K for the
year ended September 30, 1995].
3.6: Certificate of Incorporation of ICG Communications, Inc.
dated April 11, 1996. [Incorporated by reference to Exhibit
3.1 to Registration Statement on Form S-4 of ICG
Communications, Inc., File No. 333-4226].
3.7: By-laws of ICG Communications, Inc. [Incorporated by
reference to Exhibit 3.2 to Registration Statement on Form
S-4 of ICG Communications, Inc., File No. 333-4226].
(4) Instruments Defining the Rights of Security Holders,
Including Indentures.
4.1: Memorandum of Articles for the Registrant, Certificate of
Incorporation and copies of all Amendments thereto, filed
with the Registrar of Companies for the Province of British
Columbia, Canada [Incorporated by reference to Exhibit (i)
to IntelCom Group Inc.'s Form 20-F for the fiscal year
ending September 30, 1991].
4.2: Note Purchase Agreement dated September 16, 1993
[Incorporated by reference to IntelCom Group Inc.'s Annual
Report on Form 20-F for the year ended September 30, 1993,
as filed on September 30, 1994].
4.3: Note Purchase Agreement dated October 27, 1993 [Incorporated
by reference to IntelCom Group Inc.'s Annual Report on Form
20-F for the year ended September 30, 1993, as filed on
September 30, 1994].
4.4: Form of Indenture between IntelCom Group Inc. and Bankers
Trust Company for 7% Convertible Subordinated Redeemable
Notes due 1998 [Incorporated by reference to Exhibit 4.3 to
Registration
61
Statement on Form S-1 of IntelCom Group Inc.,
File No. 33-75636].
4.5: Form of Indenture between IntelCom Group Inc. and Bankers
Trust Company for 7% Simple Interest Convertible
Subordinated Redeemable Notes due 1998 [Incorporated by
reference to Exhibit 4.4 to Registration Statement on Form
S-1 of IntelCom Group Inc., File No. 33-75636].
4.6: Note Purchase Agreement, dated as of July 14, 1995, among
the Registrant, IntelCom Group (U.S.A.), Inc., Morgan
Stanley Group Inc., Princes Gate Investors, L.P., Acorn
Partnership I, L.P., PGI Investments Limited, PGI
Investments Limited, PGI Sweden AB, and Gregor von Opel and
Morgan Stanley Group, Inc., as Agent for the Purchasers
[Incorporated by reference to Exhibit 4.1 to Form 8-K of
IntelCom Group Inc., dated July 18, 1995].
4.7: Warrant Agreement, dated as of July 14, 1995, among the
Registrant, the Committed Purchasers, and IntelCom Group
(U.S.A.), Inc., as Warrant Agent [Incorporated by reference
to Exhibit 4.2 to Form 8-K of IntelCom Group Inc., dated
July 18, 1995].
4.8: First Amended and Restated Articles of Incorporation of ICG
Holdings, Inc. [Incorporated by reference to Exhibit 3.1 to
Registration Statement on Form S-4 of IntelCom Group
(U.S.A.), Inc., File No. 333-04569].
4.9: Articles of Continuation of IntelCom Group Inc.
[Incorporated by reference to Exhibit 4.1 to Registration
Statement on Form S-4 of ICG Communications, Inc., File No.
333-4226].
(9) Voting Trust Agreement.
None.
(10) Material Contracts.
10.1: Joint Venture Agreement, dated September 29, 1992, between
IntelCom Group Inc. and Greenstar Resources Ltd.
[Incorporated by reference to Exhibit 16 to IntelCom Group
Inc.'s Annual Report on Form 20-F, as amended, for the
fiscal year ended September 30, 1992].
10.2: Employment Agreement between Teleport Denver, Inc. and
William J. Maxwell [Incorporated by reference to Exhibit
3.38 to IntelCom Group Inc.'s Annual Report on Form 20-F for
the fiscal year ended September 30, 1993].
10.3: Arrangement and Support Agreement dated June 27, 1996
between ICG Communications, Inc. and IntelCom Group Inc.
[Incorporated by reference to Exhibit 2.1 to Registration
Statement on Form S-4 of ICG Communications, Inc.
(Commission File No. 333-4226)].
10.4: Stock Purchase Agreement and Accord and Satisfaction
Agreement dated June 24, 1993, between Joseph T. Buck III
and William A.
62
Byrd and TDI [Incorporated by reference to Exhibit 3.28 to
IntelCom Group Inc.'s Annual Report on Form 20-F for the
fiscal year ended September 30, 1993].
10.5: Full Payout Net Lease dated June 7, 1993 between Applied
Telecommunications Technologies, Inc. and Teleport Denver,
Inc. [Incorporated by reference to Exhibit 3.34 to IntelCom
Group Inc.'s Annual Report on Form 20-F for the fiscal year
ended September 30, 1993.]
10.6: Full Payout Net Lease dated June 18, 1993 between Applied
Telecommunications Technologies, Inc. and Teleport Denver,
Inc. [Incorporated by reference to Exhibit 3.35 to IntelCom
Group Inc.'s Annual Report on Form 20-F for the fiscal year
ended September 30, 1993].
10.7: Full Payout Net Lease dated July 16, 1993 between Applied
Telecommunications Technologies, Inc. and Teleport Denver,
Inc. [Incorporated by reference to Exhibit 3.36 to IntelCom
Group Inc.'s Annual Report on Form 20-F for the fiscal year
ended September 30, 1993].
10.8: Full Payout Net Lease dated November 10, 1993 between
Applied Telecommunications Technologies, Inc. and Teleport
Denver, Inc. [Incorporated by reference to Exhibit 3.37 to
IntelCom Group Inc.'s Annual Report on Form 20-F for the
fiscal year ended September 30, 1993].
10.9: Stock Purchase Agreement dated August 23, 1993, between
Cliff Arellano, Nancy Arellano and TDI [Incorporated by
reference to Exhibit 3.29 to IntelCom Group Inc.'s Annual
Report on Form 20-F for the fiscal year ended September 30,
1993].
10.10:Asset Purchase Agreement dated November 18, 1993, between
Mtel Digital Services, Inc. and IntelCom Group Inc.
[Incorporated by reference to Exhibit 3.30 to IntelCom Group
Inc.'s Annual Report on Form 20-F for the fiscal year ended
September 30, 1993].
10.11:Stock Purchase Agreement dated November 18, 1993, between
IntelCom Group Inc., TDI, Pacific Telecom Inc., PTI Harbor
Bay, Inc., Bay Area Teleport, Inc., and Upsouth Corporation
[Incorporated by reference to Exhibit 3.31 to IntelCom Group
Inc.'s Annual Report on Form 20-F for the fiscal year ended
September 30, 1993].
10.12:Agreement and Plan of Merger dated May 24, 1994, by and
among IntelCom Group Inc., IntelCom Group (U.S.A.), Inc. and
FiberCAP, Inc. [Incorporated by reference to Exhibit 10.69
to the Registration Statement on Form S-1, Amendment No. 4
of IntelCom Group Inc., File No. 33-76568, filed August 26,
1994].
10.13:Note Sale and Purchase Agreement dated August 3, 1994, by
and between IntelCom Group Inc., ICG Wireless Services,
Inc., Noon Investments Ltd., Melco Investments Ltd. and
Polera Overseas Inc. [Incorporated by reference to Exhibit
10.70 to the Registration
63
Statement on Form S-1, Amendment No. 4 of IntelCom Group
Inc., File No. 33-76568, filed August 26, 1994].
10.14:Agreement and Plan of Merger dated July 22, 1994, by and
among IntelCom Group Inc., IntelCom Group (U.S.A.), Inc.,
DataCom Integrated Systems Corporation, Larry DiGioia and
Richard Williams [Incorporated by reference to Exhibit 10.71
to the Registration Statement on Form S-1, Amendment No. 4
of IntelCom Group Inc., File No. 33-76568, filed August 26,
1994].
10.15:Share Exchange Agreement, dated May 31, 1994, between
IntelCom Group Inc. and Worldwide Condominium Developments,
Inc. [Incorporated by reference to Exhibit 10.71 to the
Registration Statement on Form S-1, Amendment No. 7 of
IntelCom Group Inc., File No. 33-76568, filed October 17,
1994.]
10.16:Incentive Stock Option Plan #2 [Incorporated by reference
to Exhibit 4.1 to the Registration Statement on Form S-8 of
IntelCom Group Inc., File No. 33-86346, filed November 14,
1994].
10.17:Form of Stock Option Agreement for Incentive Stock Option
Plan #2 [Incorporated by reference to Exhibit 4.2 to the
Registration Statement on Form S-8 of IntelCom Group Inc.,
File No. 33-86346, filed November 14, 1994].
10.18:Incentive Stock Option Plan #3 [Incorporated by reference
to Exhibit 4.3 to the Registration Statement on Form S-8 of
IntelCom Group Inc., File No. 33-86346, filed November 14,
1994].
10.19:Form of Stock Option Agreement for Incentive Stock Option
Plan #3 [Incorporated by reference to Exhibit 4.4 to the
Registration Statement on Form S-8 of IntelCom Group Inc.,
File No. 33-86346, filed November 14, 1994].
10.20:1994 Employee Stock Option Plan [Incorporated by reference
to Exhibit 4.5 to the Registration Statement on Form S-8 of
IntelCom Group Inc., File No. 33-86346, filed November 14,
1994].
10.21:Form of Stock Option Agreement for 1994 Employee Stock
Option Plan [Incorporated by reference to Exhibit 4.6 to the
Registration Statement on Form S-8 of IntelCom Group Inc.,
File No. 33-86346, filed November 14, 1994].
10.22:PEDTS Acquisition Note 1994-1, dated April 29, 1994, by
Pacific & Eastern Digital Transmission Services, Inc.
("PEDTS") to IntelCom Group (U.S.A.), Inc. ("ICG"), in the
amount of $2,928,591 [Incorporated by reference to Exhibit
10.27 to IntelCom Group Inc.'s Annual Report on Form 10-K
for the fiscal year ended September 30, 1994].
10.23:PEDTS Acquisition Note 1994-2, dated April 29, 1994, by
PEDTS to ICG, in the amount of $1,230,475 [Incorporated by
reference to Exhibit 10.28 to IntelCom Group Inc.'s Annual
Report on Form 10-K for the fiscal year ended September 30,
1994].
10.24:PEDTS Acquisition Note 1994-3, dated April 29, 1994, by
PEDTS to ICG, in the amount of $932,239 [Incorporated by
reference to Exhibit
64
10.29 to IntelCom Group Inc.'s Annual Report on Form 10-K
for the fiscal year ended September 30, 1994].
10.25:TTC Acquisition Note, dated November 3, 1994, by Teleport
Transmission Holdings, Inc. to ICG, in the amount of
$125,242.33 [Incorporated by reference to Exhibit 10.30 to
IntelCom Group Inc.'s Annual Report on Form 10-K for the
fiscal year ended September 30, 1994].
10.26:Agreement and Assignment, dated July 24, 1995, by Teleport
Transmission Holdings, Inc., IntelCom Group (U.S.A.), Inc.,
William W. Becker, Michael L. Glaser, William J. Laggett,
Jay E. Ricks and Gary Bryson. [Incorporated by reference to
Exhibit 10.26 to IntelCom Group Inc.'s Annual Report on Form
10-K for the fiscal year ended September 30, 1995].
10.27:Employment Agreement, dated as of May 30, 1995, between
IntelCom Group Inc. and J. Shelby Bryan [Incorporated by
reference to Exhibit 10.5 to Form 8-K of IntelCom Group
Inc., as filed on August 2, 1995].
10.28:Stock Option Agreement, dated as of May 30, 1995, between
IntelCom Group Inc. and J. Shelby Bryan [Incorporated by
reference to Exhibit 10.6 to Form 8-K of IntelCom Group
Inc., as filed on August 2, 1995].
10.29:Indemnification Agreement, dated as of May 30, 1995,
between IntelCom Group Inc. and J. Shelby Bryan
[Incorporated by reference to Exhibit 10.7 to Form 8-K of
IntelCom Group Inc., as filed on August 2, 1995].
10.30:Letter Agreement, dated July 12, 1995, between IntelCom
Group Inc. and Larry L. Becker [Incorporated by reference to
Exhibit 10.8 to Form 8-K of IntelCom Group Inc., as filed on
August 2, 1995].
10.31:Agreement and General Release, made effective July 12,
1995, between IntelCom Group Inc. and Larry L. Becker
[Incorporated by reference to Exhibit 10.9 to Form 8-K of
IntelCom Group Inc., as filed on August 2, 1995].
10.32:Subscription and Exchange Agreement, dated as of July 14,
1995, among IntelCom Group Inc., IntelCom Group (U.S.A.),
Inc., Princes Gate Investors, L.P., Acorn Partnership I,
L.P., PGI Investments Limited, PGI Sweden AB, and Gregor von
Opel [Incorporated by reference to Exhibit 10.4 to Form 8-K
of IntelCom Group Inc., as filed on August 2, 1995].
10.33:Security Agreement, dated July 18, 1995, from IntelCom
Group (U.S.A.), Inc. as issuer, and the Grantors named
therein, as grantors, to MS Group, as agent [Incorporated by
reference to Exhibit 10.1 to Form 8-K of IntelCom Group
Inc., as filed on August 2, 1995].
10.34:Pledge Agreement, dated July 18, 1995, from IntelCom Group
Inc., as a pledgor, to MS Group, as agent [Incorporated by
reference to Exhibit 10.2 to Form 8-K of IntelCom Group
Inc., as filed on August 2, 1995].
65
10.35:Subsidiary Guarantee, dated July 18, 1995, from the
persons set forth on the signature pages thereof, as
guarantors, in favor of the purchasers to the Note Purchase
Agreement referred to therein, and MS Group, as agent
[Incorporated by reference to Exhibit 10.3 to Form 8-K of
IntelCom Group Inc., as filed on August 2, 1995].
10.36:Placement Agreement, dated as of August 3, 1995, among
IntelCom Group Inc., IntelCom Group (U.S.A.), Inc., certain
subsidiaries of IntelCom Group (U.S.A.), Inc. and Morgan
Stanley & Co. Incorporated [Incorporated by reference to
Exhibit 10.1 to Form 8-K of IntelCom Group Inc., as filed on
August 9, 1995.]
10.37:Form of Exchange Agent Agreement between IntelCom Group
(U.S.A.), Inc. and Norwest Banks [Incorporated by reference
to Exhibit 10.11 to Registration Statement on Form S-4 of
IntelCom Group (U.S.A.), Inc., File No. 33-96540].
10.38:Employment Agreement between IntelCom Group Inc. and James
D. Grenfell, dated November 1, 1995. [Incorporated by
reference to Exhibit 10.38 to IntelCom Group Inc.'s Annual
Report on Form 10-K/A for the fiscal year ended September
30, 1995].
10.39:Employment Agreement between Fiber Optic Technologies,
Inc. and Mark S. Helwege, dated July 8, 1996 [Incorporated
by reference to Exhibit 10.39 to ICG Communications, Inc.'s
Annual Report on Form 10-K/A for the fiscal year ended
September 30, 1996.]
10.40:Purchase and Sale Agreement, dated as of October 19, 1995,
by and among ICG Wireless Services, Inc., IntelCom Group
(U.S.A.), Inc., UpSouth Corporation and Vyvx, Inc.
[Incorporated by reference to Exhibit 10.40 to IntelCom
Group Inc.'s Annual Report on Form 10-K for the fiscal year
ended September 30, 1995].
10.41:Employment Agreement between ICG Satellite Services, Inc.
and Douglas I. Falk, dated August 14, 1996 [Incorporated by
reference to Exhibit 10.41 to ICG Communications, Inc.'s
Annual Report on Form 10-K/A for the fiscal year ended
September 30, 1996.]
10.42:ICG Communications, Inc., 401(k) Wrap Around Deferred
Compensation Plan. [Incorporated by reference to Exhibit
10.42 to ICG Communications, Inc.'s Annual Report on Form
10-K/A for the fiscal year ended September 30, 1996.]
10.43:ICG Communications, Inc. 1996 Employee Stock Purchase
Plan. [Incorporated by reference to the Registration
Statement on Form S-8 of ICG Communications, Inc., File No.
33-14127, filed on October 14, 1996].
10.44:Consulting Services Agreement, by and between IntelCom Group
Inc. and International Communications Consulting, Inc.,
effective January 1, 1996.
10.45:Confidential General Release and Convenant Not to Sue, by
and between ICG Communications, Inc. and John D. Field,
dated November 5, 1996.
(11) Statement re Computation of per Share Earnings.
Not Applicable
66
(12) Statement re Computation of Ratios.
Not Applicable
(13) Annual Report to Security Holders.
Not Applicable
(18) Letter re Change in Accounting Principles. Letter dated March 22,
1996 from KPMG Peat Marwick LLP to the Company [Incorporated by
reference to Exhibit 18 to IntelCom Group Inc.'s Quarterly Report
on Form 10-Q/A for the quarter ended December 31, 1995].
(21) Subsidiaries of Registrant.
(22) Published Report re Matters Submitted to Vote of Security
Holders.
Not Applicable
(23) Consent.
23.1: Consent of KPMG Peat Marwick LLP
(24) Power of Attorney.
Not Applicable
(27) Financial Data Schedule.
(99) Additional Exhibits.
99.1:Report by the FCC on Preliminary Statistics of
Communications Common Carriers (1993 Edition) (pp. 39-40)
[Incorporated by reference to Exhibit 99.8 to the
Registration Statement on Form S-1, Amendment No. 4 of
IntelCom Group Inc., File No.33-76568,filed August 26,
1994].
99.2:In re Expanded Interconnection with Local Telephone Company
Facilities (Phases I & II) (FCC 1992) [Incorporated by
reference to Exhibit 3.46 to IntelCom Group Inc.'s Annual
Report on Form 20-F for the fiscal year ended September 30,
1993].
99.3:In re Teleport Transmission Holdings, (FCC 1993)
[Incorporated by reference to Exhibit 3.49 to IntelCom Group
Inc.'s Annual Report on Form 20-F for the fiscal year ended
September 30, 1993].
67
(B) Report on Form 8-K. The following report on Form 8-K was filed by
the Registrants during the three months ended December 31, 1996:
ICG Communications, Inc.: Current Report on Form 8-K dated October
25, 1996.
(C) Exhibits. The exhibits required by this Item are listed under
Item 14(A)(3).
(D) Financial Statement Schedule. The financial statement schedule
required by this Item is listed under Item 14(A)(2).
68
FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets, September 30, 1995 and 1996,
and December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations, Years Ended September 30,
1994, 1995 and 1996, and the Three Months Ended December 31, 1995
(unaudited) and 1996 . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Stockholders' Equity (Deficit), Years
Ended September 30, 1994, 1995 and 1996, and
the Three Months Ended December 31, 1996 . . . . . . . . . . . . . F-7
Consolidated Statements of Cash Flows, Years Ended September 30,
1994, 1995 and 1996, and the Three Months Ended December 31, 1995
(unaudited) and 1996 . . . . . . . . . . . . . . . . . . . . . . . F-9
Notes to Consolidated Financial Statements, September 30, 1995
and 1996, and December 31, 1996 . . . . . . . . . . . . . . . . . . F-12
F-1
Independent Auditors' Report
The Board of Directors and Stockholders
ICG Communications, Inc.:
We have audited the accompanying consolidated balance sheets of ICG
Communications, Inc. and subsidiaries as of September 30, 1995 and 1996, and
December 31, 1996 and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for each of the years in the
three-year period ended September 30, 1996, and the three-month period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ICG Communications,
Inc. and subsidiaries as of September 30, 1995 and 1996, and December 31, 1996,
and the results of their operations and their cash flows for each of the years
in the three-year period ended September 30, 1996, and the three-month period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
As explained in note 2 to the consolidated financial statements, during the year
ended September 30, 1996, the Company changed its method of accounting for
long-term telecom services contracts.
KPMG Peat Marwick LLP
Denver, Colorado
February 21, 1997
F-2
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1995 and 1996, and December 31, 1996
- --------------------------------------------------------------------------------
September 30,
----------------- --------------- December 31,
Assets 1995 1996 1996
------------ ------------------ ----------------
(in thousands)
Current assets:
Cash and cash equivalents $ 269,416 451,082 359,934
Short-term investments - 6,832 32,601
Receivables:
Trade, net of allowance of
$2,217, $2,509 and $2,515 at
September 30, 1995 and 1996,
and December 31, 1996,
respectively 23,483 34,818 41,131
Revenue earned, but unbilled
(note 2) 7,046 4,062 6,053
Joint venture and affiliate
(note 3) 732 - -
Other (note 7) 1,430 1,955 1,440
----------- -------------- ---------------
32,691 40,835 48,624
Inventory 2,165 3,206 2,845
Prepaid expenses and deposits 3,424 4,109 5,019
Notes receivable, net (note 4) 1,761 263 200
----------- -------------- ---------------
Total current assets 309,457 506,327 449,223
------------ --------------- ---------------
Property and equipment
(notes 5, 8 and 9) 228,609 383,435 460,477
Less accumulated depreciation
(note 2) (26,605) (47,298) (56,545)
------------- --------------- ---------------
Net property and
equipment 202,004 336,137 403,932
------------- --------------- ---------------
Investments (note 3) 5,209 5,169 5,170
Long-term notes receivable,
net (note 3) 7,599 6,618 623
Restricted cash (note 14) - 13,333 13,333
Other assets, net of accumulated
amortization:
Goodwill (note 3) 29,199 32,175 31,881
Deferred financing costs 16,018 22,584 21,963
Transmission and other licenses 10,792 8,611 8,526
Other (note 6) 3,275 8,397 9,482
------------- -------------- -----------------
59,284 71,767 71,852
------------- --------------- -----------------
$ 583,553 939,351 944,133
============= =============== =================
(Continued)
F-3
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
- --------------------------------------------------------------
September 30,
------------------------------
Liabilities and Stockholders' December 31,
Equity (Deficit) 1995 1996 1996
-------------- ------------- --------------
(in thousands)
Current liabilities:
Accounts payable $ 14,712 19,071 24,813
Accrued liabilities 18,346 32,810 37,309
Line-of-credit payable
(note 8) 3,692 - -
Current portion of long-term
debt (note 8) 14,454 795 817
Current portion of capital
lease obligations (notes 9
and 14) 9,164 7,487 24,683
------------- ------------- -------------
Total current liabilities 60,368 60,163 87,622
Long-term debt, net of discount,
less current portion (note 8) 379,100 668,989 690,358
Capital lease obligations, less
current portion (note 9) 26,435 70,838 71,146
Deferred income taxes (note 15) 5,702 - -
Share of losses of joint venture
in excess of investment (note 3) 1,037 2,851 -
------------- -------------- -----------------
Total liabilities 472,642 802,841 849,126
------------- --------------- -----------------
Minority interests 4,040 2,780 1,967
Redeemable preferred stock
of subsidiary ($30.5 million,
$159.1 million and $164.8
million liquidation value at
September 30, 1995 and 1996,
and December 31, 1996,
respectively)(notes 8 and 10) 14,986 153,318 159,120
Convertible Series B Preferred
Stock of subsidiary (note 11) 9,350 - -
Stockholders' equity (deficit):
Common stock (notes 1, 2
and 12) 190,753 275,355 278,686
Additional paid-in capital 26,492 23,874 23,874
Accumulated deficit (134,710) (318,817) (368,640)
-------------- -------------- ---------------
Total stockholders'
equity (deficit) 82,535 (19,588) (66,080)
-------------- --------------- ---------------
Commitments and contingencies
(notes 3, 7, 8, 9, 10 and 14)
$ 583,553 939,351 944,133
============== ============== ================
See accompanying notes to consolidated financial statements.
F-4
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended September 30, 1994, 1995 and 1996,
and the Three Months Ended December 31, 1995 (unaudited) and 1996
- ---------------------------------------------------------------------------------------------------------------------------------
Three months ended
Years ended September 30, December 31,
----------------------------------------------------------------------------
1994 1995 1996 1995 1996
--------------- -------------- --------------- ------------ ---------------
(unaudited)
(in thousands, except per share data)
Revenue:
Telecom services (note 2) $ 14,854 32,330 87,681 13,513 34,787
Network services (note 17) 36,019 58,778 60,116 15,718 15,981
Satellite services (note 13) 8,121 20,502 21,297 6,168 6,188
Other 118 - - - -
--------------- --------------- ------------ --------------- -------------
Total revenue 59,112 111,610 169,094 35,399 56,956
--------------- -------------- ------------- --------------- -------------
Operating costs and expenses:
Operating costs 38,165 78,846 135,253 27,110 49,929
Selling, general and administrative expenses 28,015 62,954 76,725 18,628 24,253
Depreciation and amortization (note 2) 8,198 16,624 30,368 4,919 9,825
--------------- -------------- ------------- ---------------- -------------
Total operating costs and expenses 74,378 158,424 242,346 50,657 84,007
Operating loss (15,266) (46,814) (73,252) (15,258) (27,051)
Other income (expense):
Interest expense (8,481) (24,368) (85,714) (15,215) (24,454)
Interest income 1,788 4,162 19,300 3,750 5,962
Share of losses of joint venture and investment (1,481) (741) (1,814) (228) -
Provision for impairment of goodwill,
investment and notes receivable (notes 3
and 4) - (7,000) (9,917) - -
Other, net (note 3) (863) (764) (9,082) (1,023) 708
-------------- --------------- -------------- --------------- -------------
(9,037) (28,711) (87,227) (12,716) (17,784)
--------------- -------------- -------------- --------------- -------------
Loss before minority interest, income taxes and
cumulative effect of change in accounting (24,303) (75,525) (160,479) (27,974) (44,835)
Minority interest in share of losses, net of
accretion and preferred dividends on subsidiary
preferred stock (notes 10 and 11) 435 (1,123) (25,306) (3,215) (4,988)
--------------- -------------- --------------- -------------- -------------
Loss before income taxes and cumulative effect
of change in accounting (23,868) (76,648) (185,785) (31,189) (49,823)
Income tax benefit (note 15) - - 5,131 - -
-------------- -------------- --------------- -------------- -------------
Loss before cumulative effect of change in accounting (23,868) (76,648) (180,654) (31,189) (49,823)
Cumulative effect of change in accounting for
revenue from long-term telecom services
contracts (note 2) - - (3,453) (3,453) -
--------------- -------------- -------------- -------------- -------------
Net loss $ (23,868) (76,648) (184,107) (34,642) (49,823)
=============== ============== ============== ============== =============
(Continued)
F-5
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations, Continued
-------------------------------------------------------------------------------------------------------------------------------
Three months ended
Years ended September 30, December 31,
--------------------------------------------------------------------------
1994 1995 1996 1995 1996
--------------- -------------- ----------- ------------------ ------------
(unaudited)
(in thousands, except per share data)
Loss per share (note 2):
Loss before cumulative effect of change in
accounting $ (1.56) (3.25) (6.70) (1.24) (1.56)
Cumulative effect of change in accounting - - (0.13) (0.14) -
-
-------------- ------------ ----------- ------------ -------------
Loss per share $ (1.56) (3.25) (6.83) (1.38) (1.56)
============== ============ ============ ============== =============
Weighted average number of shares outstanding 15,342 23,604 26,955 25,139 31,840
============== ============ ============ ============== ==============
Pro forma amounts before cumulative effects of
change in accounting assuming the new method
of accounting for revenue from long-term
telecom services contracts is applied
retroactively:
Telecom services revenue $ 14,395 31,617 87,681 13,513 34,787
Total revenue 58,653 110,897 169,094 35,399 56,956
Operating loss (15,725) (47,527) (73,252) (15,258) (27,051)
Net loss (24,327) (77,361) (180,654) (31,189) (49,823)
Loss per share
(1.59) (3.28) (6.70) (1.24) (1.56)
See accompanying notes to consolidated financial statements.
F-6
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Years Ended September 30, 1994, 1995 and 1996, and the Three Months
Ended December 31, 1996
- --------------------------------------------------------------------- -------------------------------------------------------------
Additional Total
Common stock paid-in Accumulated stockholders'
Shares Amount capital deficit equity
(deficit)
------------ ------------- ------------- ------------- --------------
(in thousands)
Balances at October 1, 1993 13,868 $ 56,201 200 (21,648) 34,753
Private placement offering costs - (89) - - (89)
Shares issued for cash-exercise of options
and warrants (note 12) 737 4,539 - - 4,539
Shares issued as repayment of debt and
related accrued interest (note 8) 110 883 - - 883
Shares issued in connection with business
combination (note 3) 1,485 23,537 - - 23,537
Shares issued in exchange for notes
receivable (note 3) 256 3,050 - - 3,050
Shares issued as contribution to 401(k)
plan (note 16) 20 257 - - 257
Warrants issued in connection with
acquisition of equipment - - 982 - 982
Issuance of bonus and penalty shares (note 12) 197 - - - -
Acquisition of minority interest of
ICG Holdings, Inc. (note 7) 374 7,228 107 (12,449) (5,114)
Change in foreign currency translation adjustment - - - (59) (59)
Compensation expense related to issuance of common
stock options - - 911 - 911
Net loss - - - (23,868) (23,868)
------------- ------------- ------------- ------------- ---------------
Balances at September 30, 1994 17,047 95,606 2,200 (58,024) 39,782
Shares issued for cash (note 12):
Public offering and private placements 6,312 84,498 - - 84,498
Public offering and private placement costs - (6,162) - - (6,162)
Exercise of options and warrants 338 1,471 - - 1,471
Shares issued as repayment of debt and related
accrued interest (note 8) 683 9,482 - - 9,482
Shares issued in connection with business
combinations (note 3) 130 1,737 - - 1,737
Conversion of ICG Holdings (Canada), Inc.
preferred shares (note 11) 302 2,000 - - 2,000
Shares issued as contribution to 401(k) plan
(note 16) 38 490 - - 490
Warrants issued in connection with offerings
(notes 8, 10 and 12) - - 24,134 - 24,134
Change in foreign currency translation adjustment - - - (38) (38)
Compensation expense related to issuance of common
stock options - - 158 - 158
Shares issued in exchange for investments and other 123 1,398 - - 1,398
assets
Shares issued as payment of trade payables 18 233 - - 233
Net loss - - - (76,648) (76,648)
------------- ------------- ------------- ------------- ----------
Balances at September 30, 1995 24,991 $ 190,753 26,492 (134,710) 82,535
F-7
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(Deficit), Continued
- -----------------------------------------------------------------------------------------------------------------------------------
Total
Additional stockholders'
Common stock paid-in Accumulated equity
Shares Amount capital deficit (deficit)
------------- ------------- ------------- ------------- ---------------
(in thousands)
Shares issued for cash-exercise of options and
warrants 1,522 $ 1,894 - - 1,894
Shares issued as repayment of debt and related
accrued interest (note 8) 130 687 - - 687
Shares issued in connection with business
combinations (note 3) 67 749 - - 749
Conversion of ICG Holdings (Canada), Inc.
preferred shares (note 11) 496 3,780 - - 3,780
Shares issued as contribution to 401(k)
plan (note 16) 87 1,156 - - 1,156
Shares issued upon conversion of subordinated
notes (note 8) 4,413 76,336 - - 76,336
Repurchase of warrants - - (2,671) - (2,671)
Compensation expense related to issuance of
common stock options - - 53 - 53
Net loss - - - (184,107) (184,107)
------------- ------------- ------------- ------------- -------------
Balances at September 30, 1996 31,703 275,355 23,874 (318,817) (19,588)
Shares issued for cash-exercise of options
and warrants 132 2,084 - - 2,084
Shares issued in connection with business
combination (note 3) 18 350 - - 350
Shares issued as contribution to 401(k)
plan (note 16) 19 480 - - 480
Shares issued upon conversion of
subordinated notes (note 8) 23 417 - - 417
Net loss - - - (49,823) (49,823)
------------- ------------- ------------- ------------- -------------
Balances at December 31, 1996 31,895 $ 278,686 23,874 (368,640) (66,080)
============= ============= ============= ============= =============
See accompanying notes to consolidated financial statements.
F-8
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended September 30, 1994, 1995 and 1996,
and the Three Months Ended December 31, 1995 (unaudited) and 1996
- ---------------------------------------------------------------------------------------------------------------------------------
Three months ended
Years ended September 30, December 31,
--------------------------------------------- -----------------------------
1994 1995 1996 1995 1996
------------- ---------------- ------------- ------------- --------------
(unaudited)
(in thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net
cash used by operating activities: $ (23,868) (76,648) (184,107) (34,642) (49,823)
Cumulative effect of change in accounting - - 3,453 3,453 -
Share of losses of joint venture and
investment 1,481 741 1,814 228 -
Minority interest in share of (losses),
net of accretion and non-cash preferred
dividends on subsidiary preferred stock (435) 656 24,279 2,188 4,988
Depreciation and amortization 8,198 16,624 30,368 4,919 9,825
Compensation expense related to issuance
of common stock options 911 158 53 14 -
Interest expense deferred and included
in long-term debt and non-cash 4,885 14,068 63,951 12,004 22,087
interest expense
Amortization of deferred financing costs
included in interest expense 615 989 2,573 527 612
Write-off of deferred finance costs upon
conversion or repayment of debt - - 2,650 - -
Contribution to 401(k) plan
through issuance of common shares 257 490 1,156 405 480
Deferred income tax benefit - - (5,329) - -
Provisions for impairment of goodwill,
investment and notes receivable - 7,000 9,917 - -
Loss on sale of certain Satellite
Services assets - - 1,124 - -
Gain on sale of interest in joint venture - - - - (776)
Decrease (increase) in operating assets,
excluding the effects of business acquisitions,
dispositions and non-cash transactions:
Accounts receivable (13,208) (6,092) (13,293) (3,742) (7,789)
Inventory (84) (447) (1,200) (272) 361
Prepaid expenses and deposits 317 (2,482) (2,975) (459) (910)
Increase in operating liabilities, excluding
the effects of business acquisitions,
dispositions and non-cash transactions:
Accounts payable and accrued liabilities 13,399 1,904 18,205 9,749 12,306
-------------- ------------- ------------- -------------- -------------
Net cash used by operating activities $ (7,532) (43,039) (47,361) (5,628) (8,639)
-------------- -------------- ------------- -------------- -------------
(Continued)
F-9
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
- ---------------------------------------------------------------------------------------------------------------------------------
Three months ended
Years ended September 30, December 31,
------------------------------------------- ---------------------------
1994 1995 1996 1995 1996
------------- --------------- ----------- --------------- ----------
(unaudited)
(in thousands)
Cash flows from investing activities:
Notes receivable $ (5,249) 348 348 (1,263) 133
Advances to affiliates - (2,184) (109) (15) -
Investment in and advances to joint venture (1,185) (5,452) (4,308) - (1)
Payments for business acquisitions, net of cash
acquired (1,811) (8,168) (8,441) - -
Acquisition of property, equipment and other
assets, net of dispositions (43,207) (49,825) (120,118) (25,768) (58,759)
Purchase of short-term investments - - (6,832) (4,979) (25,769)
Restricted cash - - (13,333) (13,333) -
Proceeds from the sale of certain Satellite
Services assets - - 21,593 21,146 -
Proceeds from sale of interest in joint venture - - - - 2,057
Other investments - (6,061) - - -
------------- ------------- ------------ -------------- ------------
Net cash used by investing activities (51,452) (71,342) (131,200) (24,212) (82,339)
------------- ------------- ------------ -------------- ------------
Cash flows from financing activities:
Issuance of common shares for cash - 84,498 - - -
Issuance of preferred shares of subsidiary for cash - 16,000 - - -
Issuance of redeemable preferred stock of subsidiary - 28,800 144,000 - -
Offering costs related to common and
preferred stock offerings - (5,565) - - -
Redemption of preferred shares - (3,800) (5,570) (5,570) -
Repurchase of redeemable preferred stock of
subsidiary and payment of accrued dividend - - (32,629) - -
Repurchase of redeemable warrants - - (2,671) - -
Proceeds from exercise of stock options and warrants 4,539 1,471 1,894 101 2,084
Proceeds from advances from related parties 3,334 - - - -
Payments on advances from related parties (7,744) - - - -
Principal payments on capital lease obligations (1,264) (6,271) (12,304) (2,991) (1,975)
Proceeds from issuance of short-term debt - - 17,500 17,500 -
Principal payments on short-term debt - - (21,192) (3,692) -
Proceeds from issuance of long-term debt 57,340 305,613 300,034 - -
Principal payments on long-term debt (4,144) (29,333) (16,920) (13,761) (279)
Deferred debt issuance costs (2,633) (13,641) (11,915) - -
---------- ------------- ------------ -------------- ------------
Net cash provided (used) by financing activities 49,428 377,772 360,227 (8,413) (170)
---------- ------------- ------------ -------------- ------------
Net (decrease) increase in cash and cash
equivalents (9,556) 263,391 181,666 (38,253) (91,148)
Cash and cash equivalents, beginning of period 15,581 6,025 269,416 269,416 451,082
------------- ------------- ----------- ------------- ------------
Cash and cash equivalents, end of period $ 6,025 269,416 451,082 231,163 359,934
============= ============= ============ ============== ============
(Continued)
F-10
ICG COMMUNICATIONS, INC.
COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
- ----------------------------------------------------------------------------------------------------------------------------------
Three months ended
Years ended September 30, December 31,
------------------------------------------- ----------------------------
1994 1995 1996 1995 1996
------------- ------------ ------------ ------------ -------------
(unaudited)
(in thousands)
Supplemental disclosure of cash flow information:
Cash paid for interest $ 2,981 9,311 19,190 2,684 1,755
============= ============ ============ ============ =============
Supplemental schedule of non-cash financing and
investing activities:
Common shares issued in connection with
business combinations, repayment of
debt or conversion of liabilities to equity $ 31,647 11,452 77,772 - 350
============= ============ ============ ============ =============
Common shares issued in exchange for
notes receivable, investments and other assets$ 3,050 1,398 - - -
============= ============ ============ ============ =============
Assets acquired under capital leases and through
the issuance of debt or warrants (note 14) $ 11,714 38,670 55,030 84 19,479
============= ============ ============ ============ =============
Liability related to business combination $ 8,746 - - - -
============= ============ ============ ============ =============
Reclassification of investment in joint
venture to long-term notes receivable $ - 6,882 - - -
============= ============ ============ ============ =============
Conversion of notes receivable related to
business combinations $ - 6,330 - - -
============= ============ ============ ============ =============
See accompanying notes to consolidated financial statements.
F-11
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995 and 1996, and December 31, 1996
- ----------------------------------------------------------------------------
(1) Organization and Nature of Business
ICG Communications, Inc. ("ICG"), a Delaware corporation, was
incorporated on April 11, 1996, for the purpose of becoming the new
publicly-traded U.S. parent company of ICG Holdings (Canada), Inc.
("Holdings-Canada"), a Canadian federal corporation (formerly known as
IntelCom Group Inc.), ICG Holdings, Inc. ("Holdings"), a Colorado
corporation (formerly known as IntelCom Group (U.S.A.), Inc.), and its
subsidiaries (collectively, the "Company"). Pursuant to a Plan of
Arrangement (the "Arrangement"), which was approved by Holdings-Canada
shareholders on July 30, 1996, and by the Ontario Court of Justice on
August 2, 1996, each shareholder of Holdings-Canada exchanged their
common shares on a one-for-one basis for either (i) shares of $.01 par
value common stock of ICG (the "Common Stock"), or (ii) Class A common
shares of Holdings-Canada (which are exchangeable at any time on a
one-for-one basis into shares of ICG Common Stock). On August 2, 1996,
28,795,132, or approximately 98%, of the total issued and outstanding
common shares of Holdings-Canada were exchanged for an equal number of
shares of Common Stock of ICG. In accordance with generally accepted
accounting principles, the Arrangement was accounted for in a manner
similar to a pooling of interests since ICG and Holdings-Canada had
common shareholders, and the number of shares outstanding and the
weighted average number of shares outstanding reflect the equivalent
shares outstanding for the combined companies.
The Company's principal business activity is telecommunications
services, including Telecom Services, Network Services and Satellite
Services. Telecom Services consists of the Company's competitive local
exchange carrier ("CLEC") operations. CLECs seek to provide an
alternative to the incumbent local exchange telephone company for a
full range of telecommunications services. The Company's Telecom
Services customers are primarily long distance carriers and resellers,
as well as business end users. Network Services supplies information
technology services and selected networking products, focusing on
network design, installation, maintenance and support for a variety of
end users, including Fortune 1000 firms and other large businesses and
telecommunications companies. Satellite Services provides satellite
voice and data services to major cruise ship lines, the commercial
shipping industry, yachts, the U.S. Navy and offshore oil platforms.
F-12
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States, and include the accounts of the
Company and its majority and wholly owned subsidiaries. Financial
information prior to the completion of the Arrangement on August
2, 1996, represents the financial position and results of
operations of Holdings-Canada and Holdings, which are considered
predecessor entities to ICG.
In addition, the accompanying consolidated financial statements
include the accounts of Teleport Transmission Holdings, Inc.
("TTH"), which holds certain transmission licenses acquired in
connection with certain of the Company's business combinations in
1994. As of December 31, 1996, TTH is owned one-third each by two
U.S. directors and one former director. TTH's financial
statements have been consolidated with the financial statements
of the Company due to common ownership and control.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
(b) Change in Fiscal Year End
The Company has elected to change its fiscal year end to December
31 from September 30, effective January 1, 1997. References to
fiscal 1996 relate to the year ended September 30, 1996.
Unaudited consolidated statements of operations and cash flows
for the three months ended December 31, 1995 have been included
in the accompanying consolidated financial statements for
comparative purposes.
(c) Cash Equivalents and Short-term Investments
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. The
Company invests primarily in high grade short-term investments
which consist of money market instruments,
F-13
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
commercial paper, certificates of deposit, government obligations
and corporate bonds, all of which are considered to be available
for sale. The Company's investment objectives are safety,
liquidity and yield, in that order. The Company carries all cash
equivalents and short-term investments at cost, which
approximates fair value.
(d) Inventory
Inventory, consisting of satellite systems equipment and
equipment to be utilized in the installation of communications
systems and networks for customers, is recorded at the lower of
cost or market, using the first-in, first-out method of
accounting for cost.
(e) Investments
Investments in joint ventures are accounted for using the equity
method, under which the Company's share of earnings or losses of
the joint ventures are reflected in operations and dividends are
credited against the investment when received. Losses recognized
in excess of the Company's investment due to additional
investment or financing requirements, or guarantees, are recorded
as a liability in the accompanying consolidated financial
statements. Other investments representing an interest of 20% or
more, but less than 50%, are accounted for using the equity
method of accounting. Investments of less than 20% are accounted
for using the cost method, unless the Company exercises
significant influence and/or control over the operations of the
investee company, in which case the equity method is used.
(f) Property and Equipment
Property and equipment are stated at cost. Costs of construction
are capitalized, including interest costs related to
construction. Equipment held under capital leases is stated at
the lower of the fair value of the asset or the net present value
of the minimum lease payments at the inception of the lease.
Depreciation is provided using the straight-line method over the
estimated useful lives of the assets owned and the related lease
term for equipment held under capital leases.
F-14
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
Effective January 1, 1996, the Company shortened the estimated
depreciable lives for substantially all of its fixed assets.
These estimates were changed to better reflect the estimated
periods during which these assets will remain in service and
result in useful lives which are more consistent with industry
practice. The changes in estimates of depreciable lives were made
on a prospective basis, beginning January 1, 1996. The effect of
this change was to increase depreciation expense and net loss for
the year ended September 30, 1996 by approximately $7.0 million
($0.26 per share).
Estimated useful lives of major categories of property and
equipment before and after January 1, 1996 are as follows:
Before After
January 1, 1996 January 1, 1996
--------------- -----------------
Office furniture and equipment 5 to 7 years 3 to 7 years
Buildings and improvements 31.5 years 31.5 years
Machinery and equipment 7 to 15 years 3 to 8 years
Switch equipment 15 years 10 years
Fiber optic transmission system 30 years 20 years
(g) Other Assets
Amounts related to the acquisition of transmission and other
licenses are recorded at cost. Amortization is provided using the
straight-line method over 20 years. Goodwill results from the
application of the purchase method of accounting for business
combinations. Amortization is provided using the straight-line
method over a maximum of 20 years.
Rights of way, minutes of use, and non-compete agreements are
recorded at cost, and amortized using the straight-line method
over the terms of the agreements, ranging from 2 to 12 years.
Amortization of deferred financing costs is provided over the
life of the related financing agreement, the maximum term of
which is 10 years.
F-15
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
(h) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates.
(i) Revenue Recognition
During fiscal 1996, the Company changed its method of accounting
for long-term telecom services contracts. Under the new method,
the Company recognizes revenue as services are provided and
continues to charge direct selling expenses to operations as
incurred. The Company had previously recognized revenue in an
amount equal to the non-cancelable portion of the contract, which
is a minimum of one year on a three-year or longer contract, at
the inception of the contract and upon activation of service to
the customer to the extent of direct installation and selling
expenses incurred in obtaining customers during the period in
which such revenue was recognized. Revenue recognized in excess
of normal monthly billings during the year was limited to an
amount which did not exceed such installation and selling
expense. The remaining revenue from the contract had been
recognized ratably over the remaining non-cancelable portion of
the contract. The Company believes the new method is preferable
because it provides a better matching of revenue and related
operating expenses and is more consistent with accounting
practices within the telecommunications industry.
As required by generally accepted accounting principles, the
Company has reflected the effects of the change in accounting as
if such change had been adopted as of October 1, 1995, and has
presented the pro forma effects on prior periods assuming the
change had been applied retroactively. The Company's results for
fiscal 1996 reflect a charge of approximately $3.5 million
relating to the cumulative effect of this change in accounting as
of October 1, 1995. The effect of this change in accounting for
fiscal 1996 was not significant.
F-16
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
Revenue from Satellite Services is recognized as services are
rendered. Revenue from Network Services contracts for the design
and installation of communication systems and networks, which are
generally short-term in duration, is recognized primarily using
the percentage of completion method of accounting. Maintenance
revenue is recognized as services are provided.
Uncollectible trade receivables are accounted for using the
allowance method.
(j) Income Taxes
The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes ("SFAS 109"). Under the asset and liability
method of SFAS 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
(k) Loss Per Share
Loss per share is calculated by dividing the net loss by the
weighted average number of shares outstanding. Weighted average
number of shares outstanding for fiscal years 1994 and 1995 and
the three months ended December 31, 1995 represents outstanding
Holdings-Canada common shares. Weighted average number of shares
outstanding for fiscal 1996 represents outstanding
Holdings-Canada common shares for the period October 1, 1995
through August 2, 1996, and outstanding ICG Common Stock and
Holdings-Canada Class A common shares (owned by third parties)
for the period August 5, 1996 through September 30, 1996 and for
the three-month period ended December 31, 1996.
F-17
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
Common stock equivalents, which include options, warrants and
convertible subordinated notes and preferred stock, are not
included in the loss per share calculation as their effect is
anti-dilutive.
(l) Stock-Based Compensation
The Company accounts for its stock-based employee and
non-employee director compensation plans using the intrinsic
value based method prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations ("APB 25"). The Company has provided pro
forma disclosures of net loss and loss per share as if the fair
value based method of accounting for these plans, as prescribed
by Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS 123"), had been
applied. Pro forma disclosures include the effects of employee
and non-employee director stock options granted during fiscal
1996 and the three months ended December 31, 1996.
(m) Impairment of Long-Lived Assets
Effective October 1, 1996 the Company adopted Statement of
Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of ("SFAS 121") which requires that long-lived assets
and certain identifiable intangibles held and used by an entity
be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may
not be recoverable. An impairment loss is recognized when
estimated undiscounted future cash flows expected to be generated
by the asset is less than its carrying value. Measurement of the
impairment loss is based on the fair value of the asset, which is
generally determined using valuation techniques such as the
discounted present value of expected future cash flows. The
adoption of SFAS 121 had no effect on the consolidated financial
statements of the Company.
(n) Reclassifications
Beginning in fiscal 1996, network operating costs, which were
previously classified as selling, general and administrative
expenses, have been reclassified as operating costs to conform
with current industry practice. Such expenses amounted to $2.6
F-18
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
million, $2.1 million, and $13.7 million in fiscal 1994, 1995 and
1996, respectively, and $2.4 million and $5.8 million for the
three months ended December 31, 1995 and 1996, respectively. All
prior financial information has been restated to conform with the
current presentation.
Certain other prior period amounts have been reclassified to
conform with the current period's presentation.
(3) Business Combinations and Investments
(a) Acquisitions and Investments During the Year Ended September 30,
1996
In January 1996, the Company purchased the remaining 49% minority
interest of Fiber Optic Technologies, Inc. ("FOTI"), making FOTI
a wholly owned subsidiary. Consideration for the purchase was
approximately $2.0 million in cash and 66,236 common shares of
Holdings-Canada valued at approximately $0.8 million, for total
consideration of approximately $2.8 million.
In February 1996, the Company entered into an agreement with
Linkatel California, L.P. ("Linkatel") and its other partners,
Linkatel Communications, Inc. and The Copley Press, Inc., under
which the Company acquired a 60% interest in Linkatel for an
aggregate purchase price of $10.0 million in cash and became the
general partner of Linkatel. In April 1996, the partnership was
renamed ICG Telecom of San Diego, L.P. ("ICG Telecom of San
Diego").
In March 1996, the Company acquired a 90% equity interest in
Maritime Cellular Tele-Network, Inc. ("MCN"), a Florida-based
provider of cellular and satellite communications for commercial
ships, private vessels, offshore oil platforms and land-based
mobile units, for approximately $0.7 million in cash and
approximately $0.1 million of assumed debt, for total
consideration of approximately $0.8 million.
In August 1996, the Company acquired the Signaling System 7
("SS7") business of Pace Network Services, Inc. ("Pace"), a
division of Pace Alternative Communications, Inc. SS7 is used by
local exchange companies, long-distance carriers, wireless
carriers and others to signal between network elements, creating
faster call set-up resulting in a more efficient use of network
resources. The
F-19
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(3) Business Combinations and Investments (continued)
Company paid cash consideration of $1.6 million as of September
30, 1996 and an additional $1.0 million in January 1997, based on
the operating results of the underlying business since the date
of acquisition.
The above acquisitions have been accounted for using the purchase
method of accounting and, accordingly, the net assets and results
of operations are included in the consolidated financial
statements from the date of acquisition. Revenue, net loss and
loss per share on a pro forma basis are not significantly
different from the Company's historical results for the periods
presented herein. The aggregate purchase price of the 1996
acquisitions, in which the Company obtained a controlling
interest, was allocated based on fair values as follows (in
thousands):
Current assets $ 6,563
Property and equipment 7,542
Other assets, including goodwill 10,647
Current liabilities (775)
Long-term liabilities (6,314)
Minority interest (1,422)
===================
$ 16,241
===================
(b) Acquisitions and Investments During the Year Ended September 30,
1995
In January 1995, the Company and an unaffiliated entity formed
Maritime Telecommunications Network, Inc. ("MTN") to provide
wireless communications through satellites to the maritime cruise
industry, U.S. Navy vessels and offshore oil platforms. The
Company acquired (i) approximately 64% of MTN, (ii) approximately
$4.4 million in notes receivable from MTN and (iii) consulting
and non-compete agreements valued at an aggregate of
approximately $0.3 million in exchange for (i) approximately $9.0
million in cash, (ii) the surrender and cancellation of a note to
the Company from the other entity for $0.6 million plus interest,
(iii) 408,347 Holdings-Canada common shares valued at
approximately $5.1 million (of which 256,303 common shares were
issued in the fourth quarter of fiscal year 1994, and (iv) the
Company's commitment to provide additional convertible working
capital advances to MTN as required by MTN. The other shareholder
of MTN contributed the assets of a predecessor business to MTN.
F-20
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(3) Business Combinations and Investments (continued)
MTN also assumed approximately $2.1 million of obligations of
such predecessor business. The Company paid a $0.5 million
finder's fee obligation of the predecessor to a third party. The
Company has also agreed that the Company will purchase the MTN
shares owned by the other shareholder of MTN at fair value, as
defined, if MTN has not completed a public offering of common
stock by January 3, 1998.
In March 1995, the Company purchased a 56% interest and in July
1995, an additional 2% interest in Zycom Corporation ("Zycom"),
an Alberta, Canada corporation whose shares are traded on the
Alberta Stock Exchange. Consideration for the purchase was
approximately $0.8 million in cash, the conversion of $2.0
million in notes receivable, and the assumption of approximately
$0.7 million in debt for total consideration of approximately
$3.5 million. In March 1996, the Company acquired an additional
approximate 12% equity interest in Zycom by converting a $3.2
million receivable due from Zycom.
The above acquisitions were accounted for using the purchase
method of accounting. The aggregate purchase price of the 1995
acquisitions, in which the Company obtained a controlling
interest, was allocated based on fair values as follows (in
thousands):
Current assets $ 1,835
Property and equipment 9,086
Other assets, including goodwill 16,986
Current liabilities (2,764)
Long-term liabilities (6,779)
Minority interest (4,850)
----------------------
$ 13,514
======================
In November 1994 and January 1995, the Company purchased an
aggregate of 571,428 shares of InterAmericas Communications
Corporation ("InterAmCom") for total cash consideration of $2.0
million, which represented an approximate 6% interest. During
fiscal 1995, the Company recorded an allowance of $2.0 million
for the impairment of the investment based on management's
estimate of the net realizable value of the investment.
F-21
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(3) Business Combinations and Investments (continued)
During fiscal 1995, the Company invested approximately $5.2
million ($3.9 million in cash, $1.1 million in common shares of
Holdings-Canada, and the conversion of approximately $0.2 million
in notes receivable) in StarCom International Optics Corporation
("StarCom"), for which the Company received a 25% equity interest
in each of Starcom's wholly owned operating subsidiaries. The
total acquisition price is included in investments in the
accompanying consolidated financial statements. The 25% equity
interest has been pledged as collateral for StarCom financings.
(c) Acquisitions During the Year Ended September 30, 1994
In August 1994, the Company acquired DataCom Integrated Systems
Corporation ("DataCom"). The Company issued 141,654
Holdings-Canada common shares (14,854 of which were issued in
fiscal 1995) valued at approximately $2.0 million as
consideration for the purchase. Based on the performance of that
business since the acquisition date, the Company issued to the
previous owners of DataCom 17,908 shares of ICG Common Stock
valued at approximately $0.4 million during the three months
ended December 31, 1996.
In July 1994, the Company completed the acquisition of FiberCap,
Inc. Consideration for the purchase was approximately $0.2
million in cash, 57,250 common shares of Holdings-Canada valued
at approximately $0.8 million and a note payable of $0.1 million,
for total consideration of $1.1 million.
In April 1994, the Company acquired Mid-American Cable Inc. for
an aggregate price of $1.6 million. Consideration for the
purchase was $0.2 million in cash and 84,401 common shares of
Holdings-Canada valued at $1.4 million.
In April 1994, the Company acquired PTI Harbor Bay, Inc./UpSouth
Corporation ("Bay Area Teleport"). Total consideration paid for
the purchase was approximately $0.3 million in cash and 1,183,147
common shares of Holdings-Canada valued at approximately $19.0
million, for total consideration of approximately $19.3 million.
In April 1994, the Company acquired substantially all the
business assets of Mtel Digital System, Inc. ("Mtel DS").
Consideration for the purchase was approximately $0.7 million in
cash and a note payable for approximately $6.9 million, bearing
F-22
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(3) Business Combinations and Investments (continued)
interest at 7.5% per annum, for total consideration of
approximately $7.6 million. The note was paid during 1995.
In connection with the Bay Area Teleport and Mtel DS
acquisitions, the Company paid an aggregate amount of
approximately $0.5 million to an unaffiliated third party as a
finder's fee, which is included in the cost of the acquisitions.
The fee was satisfied through the issuance of 31,513 common
shares of Holdings-Canada.
In February 1994, the Company agreed to acquire Nova-Net
Communications, Inc. ("Nova-Net"). The Company assumed management
control of Nova-Net effective May 1, 1994 and completed the
acquisition on November 2, 1994. Consideration for the purchase
was $0.7 million in cash, assumption of approximately $1.4
million in outstanding debt, after payments subsequent to
September 30, 1994, and approximately $6.6 million in common
shares of Holdings-Canada, for an aggregate price of
approximately $8.7 million. During fiscal 1995, the Company
recorded a provision for impairment of the goodwill recorded in
connection with the Nova-Net acquisition of $5.0 million, based
on management's estimate of the net realizable value of the
investment.
In October 1993, the Company purchased all the real and personal
property and licenses of an earth station in Steele Valley,
California, for consideration of approximately $0.9 million,
which was satisfied through the issuance of 2,253 common shares
of Holdings-Canada valued at approximately $0.1 million and $0.8
million in cash.
The above acquisitions were accounted for using the purchase
method of accounting. The aggregate purchase price of the 1994
acquisitions was allocated based on fair values as follows (in
thousands):
Current assets $ 4,848
Property and equipment 23,278
Other assets, including goodwill 19,531
Current liabilities (5,588)
===================
$ 42,069
===================
F-23
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(3) Business Combinations and Investments (continued)
(d) Investments in Joint Venture and Affiliate
In January 1997, the Company announced a joint venture with
Central and Southwest Corporation ("CSW") which will develop and
market telecommunications services in Texas and Oklahoma (and may
expand to Arkansas and Louisiana). Each party has a 50% equity
interest and is required to make additional pro rata capital
contributions as prescribed in the joint venture agreement. The
Company estimates its contributions to be approximately $24.2
million in 1997, with aggregate contributions of approximately
$49.7 million over the next five years. The joint venture will be
accounted for using the equity method of accounting.
In September 1992, the Company entered into a joint venture
agreement with Greenstar Technologies Inc. (now GST
Telecommunications, Inc. ("GST")) in which each party had a 50%
equity interest. The purpose of the joint venture was to design,
construct and operate a competitive access network in Phoenix. In
return for its 50% interest, the Company was required to provide
equity or debt financing. As of September 30, 1996, the Company
had provided financing of $11.7 million, including working
capital advances, which is included in long-term notes receivable
and had established a valuation allowance of $5.8 million due to
uncertainty of collection. Working capital advances totaled $0.4
million and were included in Receivables-Joint Venture and
Affiliate as of September 30, 1995. The Company began to record
losses for its 50% interest in the joint venture in the second
quarter of fiscal 1994, and as of September 30, 1996, had
recorded a total loss of $3.7 million, including a loss of $1.5
million for the year ended September 30, 1996. The Company's
equity contribution to the joint venture through September 30,
1996 totaled $1.2 million. Effective October 1, 1996, the Company
sold its interest in the joint venture to GST. The Company
received approximately $2.1 million in cash, representing $1.3
million of consideration for its 50% interest and $0.8 million
for equipment and amounts advanced to the joint venture. In
addition, the Company received equipment with a net book value of
$2.4 million and assumed liabilities of $0.3 million. The Company
may receive and additional $2.0 million based upon the future
performance of the business. The $0.8 million gain on sale of the
investment is included in other income for the three-month period
ended December 31, 1996.
Also included in Receivables-Joint Venture and Affiliate at
September 30, 1995, is $0.3 million due from an affiliate of the
Company's Mexican subsidiary. The
F-24
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statement, Continued
- ----------------------------------------------------------------------------
(3) Business Combinations and Investments (continued)
Company is in the process of selling its investment in Mexico.
The gain or loss on the sale is not expected to be significant.
(4) Notes Receivable
Notes receivable due within one year are comprised of the following:
September 30,
--------------------- December 31,
1995 1996 1996
---------- ---------- ------------
(in thousands)
Due from Crescomm
Telecommunications Services, Inc.,
with interest at approximately 8% $ 250 - -
Due from NovoComm, Inc., with
interest at 8% 1,500 200 200
Other 11 63 -
--------- ----------- --------
$1,761 263 200
========= =========== =========
The NovoComm, Inc. note receivable at September 30, 1996 and December
31, 1996 is net of a valuation allowance of $1.3 million based on
management's uncertainty as to collection.
F-25
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(5) Property and Equipment
Property and equipment, including assets owned under capital leases,
is comprised of the following:
September 30,
-------------------------- December 31,
1995 1996 1996
-------------- ----------- ------------
(in thousands)
Land $ 1,519 - -
Buildings and improvements 3,676 2,684 2,684
Furniture, fixtures and
office equipment 13,666 25,143 29,214
Machinery and equipment 25,195 21,057 21,398
Fiber optic equipment 39,104 77,354 89,874
Satellite equipment 15,044 18,024 20,195
Switch equipment 20,302 53,413 58,571
Fiber optic transmission system 74,251 111,172 120,548
Building/site preparation - - 21
Construction in progress (see
note 14) 35,852 74,588 117,972
------------ ------------ ------------
228,609 383,435 460,477
Less accumulated depreciation (26,605) (47,298) (56,545)
------------ ------------ ------------
$ 202,004 336,137 403,932
============ ============ =============
Property and equipment includes approximately $118.0 million of
equipment which has not been placed in service at December 31, 1996,
and accordingly is not being depreciated. The majority of this amount
is related to new network construction (see note 14).
F-26
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(5) Property and Equipment (continued)
Certain of the above assets have been pledged as security for long-term
debt and capital lease obligations at December 31, 1996. The following
is a summary of property and equipment owned under capital leases:
September 30,
------------------------------- December 31,
1995 1996 1996
---------------- ------------- --------------
(in thousands)
Machinery and equipment $ 10,349 7,882 8,043
Fiber optic equipment 663 395 377
Switch equipment 17,529 26,509 25,733
Construction in progress 13,935 52,645 71,842
-------------- --------------- -------------
42,476 87,431 105,995
Less accumulated
depreciation (2,117) (4,362) (5,171)
============== =============== =============
$ 40,359 83,069 100,824
============== =============== =============
F-27
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(6) Other Assets
Other assets are comprised of the following:
September 30, December 31,
---------------------------- ---------------
1995 1996 1996
------------ -------------- ---------------
(in thousands)
Deposits 811 3,514 3,579
PACE customer base - 1,580 2,581
Rights of way 1,091 1,707 1,739
Minutes of use agreement - 1,421 1,421
Non-compete agreements 602 602 902
Risk premium 2,004 - -
Other 552 800 807
----------- ------------ ---------------
5,060 9,624 11,029
Less accumulated
amortization (1,785) (1,227) (1,547)
=========== ============ ===============
Other $ 3,275 8,397 9,482
=========== ============= ===============
(7) Related Party Transactions
During fiscal 1996, Holdings-Canada and International Communications
Consulting, Inc. ("ICC") entered into a consulting agreement whereby
ICC will provide various consulting services to the Company through
December 1999 in exchange for approximately $4.2 million in consulting
fees to be paid during the term of the agreement. During fiscal 1996
and for the three-month period ended December 31, 1996, the Company
paid $1.3 million and $0.3 million, respectively, related to this
consulting agreement. William W. Becker, a stockholder and former
director of the Company, is President and Chief Executive Officer of
ICC.
At September 30, 1995 and 1996, and December 31, 1996, receivables from
officers and employees in the amount of approximately $0.6 million are
primarily comprised of notes bearing interest at 7% and are included in
Receivables-Other in the accompanying consolidated financial
statements. The notes receivable relate to relocation expenses of
officers.
Effective May 31, 1994, the Company acquired the remaining 4% minority
interest in Holdings from Worldwide Condominium Developments, Inc.
("WWCDI"), a related
F-28
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(7) Related Party Transactions (continued)
entity. The 4% interest was exchanged for (i) the transfer of the
Company's oil and gas properties (at an estimated value of
approximately $0.9 million), (ii) the surrender and cancellation of two
demand promissory notes receivable from William W. Becker, owner of
WWCDI (the "Becker Interests"), in the total principal amount of
approximately $4.0 million and (iii) 373,663 common shares of
Holdings-Canada. The 4% minority interest in Holdings was valued at
approximately $12.2 million by the non-related members of the Company's
Board of Directors. The transaction was approved unanimously by
Holdings-Canada's non-related directors, and ratified by
Holdings-Canada's non-related shareholders. Due to the related party
nature of the purchase, the investment has been recorded at the
historical basis of WWCDI. As a result, consideration in excess of the
historical basis has been recorded in a manner similar to a dividend.
F-29
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(8) Long-term Debt and Short-term Notes Payable
Long-term debt is summarized as follows:
September 30, December 31,
------------------------ ----------------
1995 1996 1996
----------- ------------- --------------
(in thousands)
12 1/2% Senior discount notes,
net of discount (a) $ - 315,626 325,530
13 1/2% Senior discount notes,
net of discount (b) 299,934 343,772 355,955
Convertible subordinated
notes (c) 74,434 491 65
Credit facility (d) 13,515 - -
Note payable with interest at
the 90-day commercial paper
rate plus 4.75% (10.09% at
December 31, 1996), due 2001,
secured by certain telecommuni-
cations equipment - 5,888 5,815
Note payable with interest at 11%,
due monthly through fiscal 1999,
secured by equipment 3,493 2,803 2,625
Mortgage payable with interest at
8.5%, due monthly through 2009,
secured by building 1,242 1,194 1,177
Notes payable to sellers of FOTI
and FOTDS (e) 600 - -
Other 336 10 8
--------- -------------- --------------
$393,554 669,784 691,175
Less current portion (14,454) (795) (817)
---------- -------------- --------------
$379,100 668,989 690,358
========== ============== ==============
(a) 12 1/2% Senior Discount Notes
On April 30, 1996, Holdings completed a private placement (the
"1996 Private Offering") of 12 1/2% Senior Discount Notes (the
"12 1/2% Notes") and of 14 1/4% Exchangeable Preferred Stock (the
"14 1/4% Preferred Stock") for gross proceeds of $300.0 million
and $150.0 million, respectively. Net proceeds from the 1996
Private Offering, after issuance costs of approximately $17.0
million, were approximately $433.0 million.
The 12 1/2% Notes are unsecured senior obligations of Holdings
(guaranteed by ICG and Holdings-Canada) that mature on May 1,
2006, with a maturity value of $550.3
F-30
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(8) Long-term Debt and Short-term Notes Payable (continued)
million. Interest will accrue at 12 1/2% per annum beginning May
1, 2001, and is payable each May 1 and November 1 commencing
November 1, 2001. The 12 1/2% Note indenture contains certain
covenants which provide for limitations on indebtedness,
dividends, asset sales and certain other transactions.
The 12 1/2% Notes were originally recorded at approximately
$300.0 million. The discount on the 12 1/2% Notes and the debt
issuance costs are being accreted over ten years until maturity
at May 1, 2006. The accretion of the discount and debt issuance
costs is included in interest expense in the accompanying
consolidated financial statements.
Approximately $35.3 million of the proceeds from the 1996 Private
Offering were used to redeem the 12% redeemable preferred stock
of Holdings (the "Redeemable Preferred Stock") issued in August
1995 ($30.0 million), pay accrued preferred dividends ($2.6
million) and to repurchase 916,666 warrants of the Company ($2.7
million) issued in connection with the Redeemable Preferred
Stock. The Company recognized a charge to minority interest in
share of losses, net of accretion and preferred dividends on
subsidiary preferred stock of approximately $12.3 million for the
excess of the redemption price of the Redeemable Preferred Stock
over the carrying amount at April 30, 1996, and recognized a
charge to interest expense of approximately $11.5 million for the
payments made to noteholders with respect to consents to
amendments to the indenture governing the 13 1/2% Notes to permit
the 1996 Private Offering.
(b) 13 1/2% Senior Discount Notes
On August 8, 1995, Holdings completed a high yield debt offering
(the "1995 Private Offering") through the issuance of 58,430
units (the "Units"), each Unit consisting of ten $1,000, 13 1/2%
Senior Discount Notes (the "13 1/2% Notes") due September 15,
2005, and warrants to purchase 33 common shares of
Holdings-Canada (the "Unit Warrants"), resulting in net proceeds
of approximately $286.0 million, net of approximately $14.0
million in issuance costs. The 13 1/2% Notes were sold at
approximately 51% of the stated maturity of $584.3 million, and
will mature on September 15, 2005. Interest accrues at the rate
of 13 1/2% per annum beginning September 15, 2000 and is payable
in cash each March 15 and September 15 commencing March 15, 2001.
F-31
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(8) Long-term Debt and Short-term Notes Payable (continued)
The 13 1/2% Notes were originally recorded at approximately
$294.0 million, which represents the $300.0 million in proceeds
less the approximate $6.0 million value assigned to the Unit
Warrants, which is included in additional paid-in capital. The
discount on the 13 1/2% Notes is being accreted using the
interest method over five years until September 15, 2000, the
date at which the 13 1/2% Notes can first be redeemed. The value
assigned to the Unit Warrants, representing additional debt
discount, is also being accreted to the debt over the five-year
period. The accretion of the total discount is included in
interest expense in the accompanying consolidated financial
statements.
Holdings may redeem the 13 1/2% Notes on or after September 15,
2000, in whole or in part, at the redemption prices set forth in
the agreement, plus unpaid interest, if any, at the date of
redemption. The 13 1/2% Notes are guaranteed on a senior,
unsecured basis by ICG and Holdings-Canada. The 13 1/2% Note
indenture contains certain covenants which provide for
limitations on indebtedness, dividends, asset sales, and certain
other transactions.
The Unit Warrants entitle the holder to purchase one common share
of Holdings-Canada at the exercise price of $12.51 per share and
are exercisable at any time between August 8, 1996 and August 8,
2005 (see note 12 (c)).
In connection with the issuance of the 13 1/2% Notes, the Company
obtained $6.0 million of interim financing from the placement
agent and certain private investors in exchange for the issuance
of an aggregate of 520,000 Series A Warrants (see note 12 (c)).
The $6.0 million was repaid with a portion of the proceeds from
the 1995 Private Offering. As a result of the repayment of the
interim financing, the value assigned to the Series A Warrants
totaling approximately $3.0 million, representing debt discount,
was charged to interest expense during the year ended September
30, 1995.
(c) Convertible Subordinated Notes
Effective September 17, 1993, Holdings-Canada issued $18.0
million in convertible subordinated notes with interest at 8%
("8% Notes"). Interest was payable, at the option of the Company,
in cash or through the issuance of additional 8% Notes. The 8%
Notes were subordinated to all present and future senior debt.
F-32
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(8) Long-term Debt and Short-term Notes Payable (continued)
The 8% Notes, excluding unpaid interest, were convertible, at the
option of the holder, at any time into common shares of
Holdings-Canada at a conversion price of $15.60 for each common
share. During fiscal 1995, approximately $1.1 million of the 8%
Notes, including approximately $0.1 million of interest paid in
8% Notes, were converted to 69,230 common shares of
Holdings-Canada. During fiscal 1996, the remaining $17.0 million
of the 8% Notes and approximately $3.1 million of interest paid
in 8% Notes were converted into 1,289,738 shares of
Holdings-Canada.
The Company, in conjunction with the issuance of the 8% Notes,
paid to its placement agent a private placement fee of $0.9
million. The private placement fee was included in deferred
financing costs as of September 30, 1995 and was being amortized
over the term of the 8% Notes. During the year ended September
30, 1996, the remaining $0.5 million of deferred financing costs
were written off upon conversion of the 8% Notes.
Effective October 28, 1993, the Company issued approximately
$47.8 million in convertible subordinated notes with interest at
7% ("7% Notes"). The 7% Notes were due October 30, 1998, unless
earlier converted or redeemed. Interest was payable, at the
option of the Company, in cash or through the issuance of
additional 7% notes. The 7% Notes were subordinated to all
present and future senior debt.
All or any portion of the outstanding principal amount of any
note and interest are convertible, at the option of the holder,
into common shares of Holdings-Canada at a conversion price of
$18.00 for each common share.
During fiscal 1996, the Company notified the holders of the 7%
Notes of its intent to redeem the 7% Notes, together with accrued
interest. As of December 31, 1996, approximately $47.8 million of
the 7% Notes and approximately $8.9 million of interest paid in
7% Notes were converted into 3,146,283 shares of Holdings-Canada.
As of December 31, 1996, approximately $0.1 million of interest
paid in 7% Notes remains outstanding, which are in the process of
being converted.
The Company paid to the placement agent a private placement fee
of approximately $2.4 million. The private placement fee,
included in deferred financing costs, was being amortized over
the term of the 7% Notes. During the year ended September 30,
F-33
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(8) Long-term Debt and Short-term Notes Payable (continued)
1996, approximately $1.1 million of deferred financing costs were
written off upon conversion of the 7% Notes.
(d) Credit Facility
Effective November 16, 1990, the Company, through Teleport Denver
Ltd. ("TDL"), a subsidiary of Holdings, entered into an $18.0
million financing arrangement with Communications Credit Corp.
("CCC"), a subsidiary of Northern Telecom Finance Corporation, to
provide for the acquisition, construction, installation,
operation, maintenance and expansion of a fiber optic
transmission system. The promissory notes accrued interest at
5.5% over the 90-day high grade commercial paper rate with a
maximum rate of 14.5%.
In December 1995, the Company refinanced this credit facility as
part of the short-term financing agreement with Norwest Bank
Colorado, N.A. ("Norwest"), described below, which was repaid in
March, 1996. During the year ended September 30, 1996, $1.1
million of deferred financing costs were written off upon payment
of the credit facility.
(e) Notes Payable to Sellers of FOTI and FOTDS
In conjunction with the 1992 acquisitions of FOTI and Fiber Optic
Technologies Data Systems, Inc. ("FOTDS"), the Company issued
notes payable of approximately $2.0 million bearing interest at
7% per annum, payable annually in cash or common shares of
Holdings-Canada at the option of the Company. The principal was
payable through the issuance of 266,800 common shares of
Holdings-Canada, at a deemed value of $7.50 per common share. As
of September 30, 1995, 186,800 Holdings-Canada common shares had
been issued. On January 3, 1996, the final payment was satisfied
at a discount, with the Company issuing 76,027 common shares of
Holdings-Canada pursuant to an agreement to purchase the
remaining 49% of FOTI (see note 3).
F-34
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(8) Long-term Debt and Short-term Notes Payable (continued)
Scheduled principal maturities of long-term debt as of December 31,
1996 are as follows (in thousands):
Due within:
One year $ 817
Two years 1,774
Three years 1,680
Four years 1,287
Five years 938
Thereafter (a) 1,137,794
------------
1,144,290
Less unaccreted
discount on the 12 1/2%
Notes and 13 1/2% Notes (453,115)
-------------
$ 691,175
=============
(a) Includes $550.3 million of 12 1/2% Notes and $584.3 million of 13
1/2% Notes due at maturity.
Short-term Note Payable and Line-of-Credit
At September 30, 1995, FOTI maintained a $4.0 million line of credit
bearing interest at the prime rate plus 5% that was payable on
demand. In December 1995, the Company refinanced the line of credit
as part of a short-term facility with Norwest described below.
In December 1995, Holdings obtained $17.5 million of short-term
financing with Norwest, with interest at 2.5% above the Money Market
Account yield, to refinance certain of the Company's debt. The
Company paid off this debt and accrued interest in March 1996.
(9) Capital Lease Obligations
The Company is obligated under various capital lease agreements for
equipment at September 30, 1995 and 1996, and December 31, 1996.
Capital lease obligations increased in fiscal 1996 primarily due to the
Company's agreement with Southern
F-35
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(9) Capital Lease Obligations (continued)
California Edison Company to license fiber optic cable in Southern
California (see note 14(a)).
The future required payments under the Company's capital lease
obligations subsequent to December 31, 1996 are as follows (in
thousands):
Due within:
One year $ 31,552
Two years 15,644
Three years 13,914
Four years 14,340
Five years 17,352
Thereafter 107,532
-----------
Total minimum lease payments 200,334
Less amounts representing
interest (104,505)
-----------
Present value of net
minimum lease payments 95,829
Less current portion (24,683)
-----------
$ 71,146
===========
(10) Redeemable Preferred Stock of Subsidiary
12% Redeemable Preferred Stock
In August 1995, Holdings-Canada completed a private placement of
preferred stock (the "Private Placement") in connection with the 1995
Private Offering discussed in note 8. The Private Placement consisted
of 300,000 shares of Redeemable Preferred Stock and warrants to
purchase 2,750,000 common shares of Holdings-Canada (see note 12(c))
for net proceeds of $28.8 million, after payment of $1.2 million in
issuance costs. The Redeemable Preferred Stock accrued dividends
quarterly at an annual rate of 12% per annum.
The Redeemable Preferred Stock was originally recorded at approximately
$13.7 million, which represents the $28.8 million in net proceeds less
the approximate $15.1 million value assigned to the warrants, which was
included in additional paid-in capital of the Company. The value
assigned to the warrants, representing a discount on the Redeemable
F-36
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(10) Redeemable Preferred Stock of Subsidiary (continued)
Preferred Stock, was accreted through the time the Redeemable
Preferred Stock was redeemed on April 30, 1996 with a portion of the
proceeds from the 1996 Private Offering.
14 1/4% Exchangeable Preferred Stock
The 14 1/4% Preferred Stock consists of 150,000 shares of preferred
stock that bear a cumulative dividend at the rate of 14 1/4% per annum.
The dividend is payable quarterly in arrears each February 1, May 1,
August 1 and November 1 commencing August 1, 1996. Through May 1, 2001,
the dividend is payable, at the option of the Company, in cash or
additional shares of 14 1/4% Preferred Stock. The Company may exchange
the 14 1/4% Preferred Stock into 14 1/4% Senior Subordinated Exchange
Debentures at any time after the exchange is permitted by certain
indenture restrictions. The 14 1/4% Preferred Stock is subject to
mandatory redemption on May 1, 2007.
Included in minority interest in share of losses, net of accretion and
preferred dividends on subsidiary preferred stock for the years ended
September 30, 1995 and 1996, and the three months ended December 31,
1996, is approximately $1.3 million, $27.0 million and $5.8 million,
respectively, associated with the Redeemable Preferred Stock (fiscal
1995 and fiscal 1996) and the 14 1/4% Preferred Stock (fiscal 1996 and
the three months ended December 31, 1996), including the accretion of
warrants issued in connection with the Redeemable Preferred Stock,
accretion of issuance costs and a 12% and 14 1/4% preferred stock
dividend accrual on the Redeemable Preferred Stock and the 14 1/4%
Preferred Stock, respectively. These costs are partially offset by the
minority interest share of losses in subsidiaries of approximately $0.6
million, $2.7 million and $0.8 million for the years ended September
30, 1995 and 1996, and the three months ended December 31, 1996,
respectively.
(11) Convertible Preferred Stock of Subsidiary
Convertible Series B Preferred Stock, no par value, 2,000,000 shares
authorized; 990,000 shares issued and outstanding at September 30,
1995.
In May and June 1995, Holdings-Canada sold an aggregate of 1,600,000
convertible preferred shares, having an aggregate stated value of $16.0
million. Net proceeds to the Company, after issuance costs of
approximately $0.9 million, were approximately $15.1
F-37
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(11) Convertible Preferred Stock of Subsidiary (continued)
million. The convertible preferred shares were convertible at the
holders' election into common shares of Holdings-Canada commencing in
July 1995, at a discount from the market price at the time of
conversion equal to 18.5% for $6.0 million of the convertible preferred
shares ("Series A Preferred Stock") and 17.5% for $10.0 million of the
convertible preferred shares ("Series B Preferred Stock").
In July 1995, 10,000 shares of the Series B Preferred Stock were
repurchased for $0.1 million in cash. In August and September 1995,
200,000 shares of the Series A Preferred Stock were converted to
302,029 common shares of Holdings-Canada valued at $2.0 million, and
400,000 shares of the Series A Preferred Stock were repurchased for
approximately $4.2 million in cash. The excess of the repurchase price
over the stated value of the Series A and Series B Preferred Stock
repurchased of approximately $0.5 million was treated as a preferred
stock dividend and is included in minority interest in share of losses,
net of accretion and preferred dividends on subsidiary preferred stock
in the accompanying consolidated financial statements.
During fiscal 1996, the Company repurchased approximately $5.6 million
of the Series B Preferred Stock, and approximately $3.8 million of the
Series B Preferred Stock was converted to Holdings-Canada common
shares. The excess of the repurchase and conversion price over the
stated value of the Series B Preferred Stock of approximately $1.0
million has been treated as a preferred stock dividend and is included
in minority interest in share of losses, net of accretion and preferred
stock dividends on subsidiary preferred stock in the accompanying
consolidated financial statements. No convertible preferred shares
remained outstanding at September 30, 1996.
F-38
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(12) Stockholders' Equity (Deficit)
Common Stock
Common stock outstanding at December 31, 1996 represents the issued and
outstanding Common Stock of ICG and Class A common shares of
Holdings-Canada (owned by third parties) which are exchangeable at any
time, on a one-for-one basis, for ICG Common Stock. The following table
sets forth the number of shares outstanding for ICG and Holdings-Canada
on a separate company basis as of December 31, 1996:
Shares owned Shares owned by
by ICG third parties
------------- -----------------
ICG Common Stock, $.01 par value,
100,000,000 shares authorized; 0,
29,888,376 and 31,087,825 shares
issued and outstanding at September
30, 1995 and 1996, and December 31,
1996, respectively
- 31,087,825
Holdings-Canada Class A common shares,
no par value, 100,000,000 shares
authorized; 24,990,839, 31,672,103 and
31,795,270 shares issued and outstanding
at September 30, 1995 and 1996, and
December 31, 1996, respectively:
Class A common shares, exchangeable on a
one-for-one basis for ICG Common Stock
at any time - 807,054
Class A common shares owned by ICG 30,988,216 -
--------------
Total shares outstanding 31,894,879
==============
F-39
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(12) Stockholders' Equity (Deficit) (continued)
(a) Private Placements
In May and June 1995, the Company privately placed 595,000 common
shares of Holdings-Canada for $7.50 per share. Net proceeds to
the Company, after issuance costs of approximately $0.4 million,
were approximately $4.0 million. Pursuant to a private placement
memorandum dated June 1993, for the issue of 1,500,000 common
shares for approximately $8.3 million, the Company agreed to file
a registration statement with the Securities and Exchange
Commission of the United States that was to become effective on
or before October 11, 1993. The registration statement did not
become effective on or before that date. As a result, the Company
issued, for no additional consideration, an additional 197,250
shares to the investors. The issuance of these additional shares
was recorded as a capital transaction during the year ended
September 30, 1994.
(b) Stock Options and Employee Stock Purchase Plan
In fiscal years 1991, 1992 and 1993, the Company's Board of
Directors approved incentive stock option plans and
replenishments to those plans which provide for the granting of
options to directors, officers, employees and consultants of the
Company to purchase 285,000, 742,400 and 1,692,700 shares,
respectively, of the Company's Common Stock, with exercise prices
between 80% and 100% of the fair value of the shares at the date
of grant. A total of 1,849,600 options have been granted under
these plans with exercise prices ranging from approximately $2.92
to $14.03. Compensation expense has been recorded for options
granted at an exercise price below the fair market value of the
Company's Common Stock at the date of grant, pursuant to the
provisions of APB 25. The options granted under these plans are
subject to various vesting requirements and expire in five and
ten years from the date of grant.
In fiscal years 1994, 1995 and 1996, and the three months ended
December 31, 1996, the Company's Board of Directors approved
incentive and non-qualified stock option plans and replenishments
to those plans which provide for the granting of options to
certain directors, officers and employees to purchase 2,536,000
shares of the Company's Common Stock under the 1994 plan and an
aggregate of 2,700,000 shares of the Company's Common Stock under
the 1995 and 1996 plans. A total of 4,177,381 options have been
granted under these plans at exercise prices ranging
F-40
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(12) Stockholders' Equity (Deficit) (continued)
from $7.94 to $26.25, none of which were less than 100% of the
fair market value of the shares underlying options on the date of
grant, and, accordingly, date of grant, and accordingly, no
compensation expense has been recorded for these options under
APB 25. The options granted under these plans are subject to
various vesting requirements and expire in five and ten years
from the date of grant.
In October 1996, the Company established an Employee Stock
Purchase Plan whereby employees can elect to designate 1% to 30%
of their annual salary, up to a limit of $25,000 per year, to be
used to purchase shares of the Company's Common Stock at a 15%
discount to fair market value. Stock purchases will occur four
times a year on February 1, May 1, August 1 and November 1, with
the price per share equaling the lower of 85% of the market price
at the beginning or end of the offering period. The Company is
authorized to issue a total of 1,000,000 shares of Common Stock
to participants in the plan. No shares of the Company's Common
Stock had been sold to employees under this plan as of December
31, 1996. On February 1, 1997, the Company sold 22,330 shares of
the Company's Common Stock to employees under this plan.
The Company recorded compensation expense in connection with its
stock-based employee and non-employee director compensation plans
of $0.9 million, $0.2 million, $0.1 million and $0.2 million for
fiscal years 1994, 1995 and 1996, and the three months ended
December 31, 1996, respectively, pursuant to the intrinsic value
based method of APB 25. Had compensation expense for the
Company's plans been determined based on the fair market value of
the options at the grant dates for awards under those plans
consistent with the provisions of SFAS 123, the Company's pro
forma net loss and loss per share would have been as presented
below. Pro forma disclosures include the effects of employee and
non-employee director stock options granted during fiscal 1996
and the three months ended December 31, 1996.
F-41
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(12) Stockholders' Equity (Deficit) (continued)
Year ended Three months ended
September 30, 1996 December 31, 1996
------------------------- ---------------------
(in thousands, except per share amounts)
Net loss:
----------
As reported $ (184,107) (49,823)
Pro forma (186,831) (50,819)
Loss per share:
---------------
As reported $ (6.83) (1.56)
Pro forma (6.93) (1.60)
The fair value of each option grant was estimated on the date of
grant using the Black-Scholes option-pricing model with the
following weighted average assumptions for the year ended
September 30, 1996 and the three months ended December 31, 1996:
an expected option life of three years for directors, officers
and other executives, and two years for other employees, for both
periods; expected volatility of 50% for both periods; and
risk-free interest rates ranging from 5.03% to 6.57% for
directors, officers and other executives and 5.22% to 6.10% for
other employees, for both periods. Risk-free interest rates, as
were currently available on the grant date, were assigned to each
granted option based on the zero-coupon rate of U.S. Treasury
bills to be held for the same period as the assumed option life.
Since the Company does not anticipate issuing any dividends on
its Common Stock, the dividend yield was assumed to be zero. The
weighted average fair market value of options granted during the
year ended September 30, 1996 and the three months ended December
31, 1996 was approximately $5.28 and $9.42 per option,
respectively.
As options outstanding at December 31, 1996 will continue to vest
in subsequent periods and additional options are expected to be
awarded under existing and new plans, the above pro forma results
of applying a fair value based method of accounting for
stock-based compensation for the year ended September 30, 1996
and the three months ended December 31, 1996 are not necessarily
indicative of the effects on net loss and loss per share in
future periods.
F-42
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(12) Stockholders' Equity (Deficit) (continued)
The following table summarizes the status of the Company's stock-based
compensation plans as of and for the fiscal years ended September 30,
1994, 1995 and 1996, and as of and for the three months ended December
31, 1996:
Shares Weighted
underlying average Options
options exercise price exercisable
------------- ---------------- ------------
(in thousands) (in thousands)
Outstanding at October 1, 1993 865
Granted 516 $ 12.23
Exercised (62) 3.34
-------------
Outstanding at September 30, 1994 1,319 6.81 769
Granted 2,520 9.73
Exercised (264) 3.32
Canceled (201) 13.25
-------------
Outstanding at September 30, 1995 3,374 9.08 940
Granted 1,322 11.78
Exercised (248) 7.55
Canceled (243) 11.12
-------------
Outstanding at September 30, 1996 4,205 9.77 2,264
Granted 335 18.59
Exercised (31) 8.95
Canceled (56) 12.65
--------------
Outstanding at December 31, 1996 4,453 10.34 2,969
==============
F-43
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(12) Stockholders' Equity (Deficit) (continued)
The following table summarizes information about options
outstanding at December 31, 1996:
Options outstanding Options exercisable
---------------------------- -----------------------------------
Weighted
average Weighted Weighted
Range of remaining average average
exercise Number contractual exercise Number exercise
prices outstanding life price exercisable price
- ----------- -------------- ------------- ----------- ------------ -----------
(in thousands) (in years) (in thousands)
$2.92- 6.74 353 5.93 $ 3.23 353 $ 3.23
7.94 1,550 8.41 7.94 1,550 7.94
8.50-10.00 1,027 8.81 9.76 377 9.36
10.88-19.13 1,430 8.24 14.35 687 12.80
19.25-26.25 93 9.65 22.09 2 21.00
---------- ------------
4,453 2,969
========== ============
(c) Warrants
During the years ended September 30, 1994, 1995 and 1996, and the
three months ended December 31, 1996, the Company's warrant
activity was as follows:
(i) During the year ended September 30, 1993, the Company
issued to WWCDI bonus warrants to purchase 6,680
Holdings-Canada common shares at an exercise price of
$7.50. At September 30, 1994, all of these warrants had
been exercised for $50,100.
(ii) During the year ended September 30, 1993, the Company
issued to a debt holder warrants to purchase 17,067,
3,255 and 11,039 common shares at exercise prices of
$6.56, $7.38 and $7.88, respectively. During the year
ended September 30, 1994, 17,067 warrants were exercised
for proceeds of $111,960. In addition, during the year
ended September 30, 1994, the Company issued to the same
debt holder additional warrants to purchase 1,989, 15,260
and 3,665 common shares of Holdings-Canada at $21.51,
F-44
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(12) Stockholders' Equity (Deficit) (continued)
$20.01 and $11.80 per share, exercisable on or before
November 10, 1998, March 24, 1999, and July 8, 1999,
respectively. An additional 7,725 warrants were issued on
July 10, 1995 at an exercise price of $14.50, which
expire on July 9, 2000. Also issued on July 10, 1995 were
60,000 additional warrants to an affiliate of the debt
holder at an exercise price of $14.50, which expire on
July 9, 2000. During the three-month period ended
December 31, 1996, 1,231 of the $7.38 warrants, 4,456 of
the $7.88 warrants and 2,215 of the $11.80 warrants
were canceled.Total warrants outstanding held by the debt
holder and affiliates were 95,031 at December 31, 1996.
(iii) During the year ended September 30, 1994, the Company
issued to two financial advisors warrants to purchase
75,000 and 200,000 common shares of Holdings-Canada.
These warrants have an exercise price of $7.94 and $18.00
and are exercisable for two- and five- year periods,
respectively. During the years ended September 30, 1995
and 1996, 74,335 and 665 of the 75,000 warrants were
exercised for proceeds of $590,035 and $5,278,
respectively. During the three-month period ended
December 31, 1996, 100,000 of the 200,000 warrants were
exercised for proceeds of $1.8 million. At December 31,
1996, 100,000 warrants remained outstanding.
(iv) Pursuant to a private placement during the year ended
September 30, 1992, the Company issued to William W.
Becker, a former director of the Company, warrants to
purchase 600,000 common shares of Holdings-Canada at
exercise prices of $5.65 and $6.51 on or before February
11, 1993 and 1994, respectively. During the year ended
September 30, 1994, these warrants were exercised for
proceeds of approximately $3.8 million.
(v) Pursuant to a private placement of the Redeemable
Preferred Stock and the interim financing arrangement
during the year ended September 30, 1995, the Company
issued 1,895,000 Series A Warrants and 1,375,000 Series B
Warrants to purchase an equal number of common shares of
Holdings-Canada. The exercise prices are $7.94 and $8.73,
respectively, and the warrants expire on July 14, 2000.
None of the warrants had been exercised as of September
30, 1995. During the year ended September 30, 1996, the
Company repurchased 458,333 each of the Series A and
Series B Warrants for $3.21 and $2.52, respectively (see
note 8). In addition, 1,853,334
F-45
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(12) Stockholders' Equity (Deficit) (continued)
warrants were exercised in June 1996 through a cashless
exercise in which 1,271,651 Holdings-Canada common shares
were issued. As of December 31, 1996, 250,000 Series A
Warrants and 250,000 Series B Warrants remain outstanding.
(vi) In connection with the 1995 Private Offering, the Company
issued 1,928,190 warrants to purchase an equal number of
common shares of Holdings-Canada. The warrants are
exercisable beginning August 8, 1996 at $12.51 per share and
expire on August 6, 2005. As of December 31, 1996, all of
these warrants remain outstanding.
F-46
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(12) Stockholders' Equity (Deficit) (continued)
The following table summarizes warrant activity for the three years
ended September 30, 1996 and the three months ended December 31, 1996:
Outstanding Price
warrants range
--------------- --------------------
(in thousands)
Outstanding, October 1, 1993 689 $5.65 - 7.88
Granted 296 7.94 - 21.51
Exercised (675) 5.96 - 7.50
---------------
Outstanding, September 30, 1994 310 7.38 - 21.51
Granted 5,266 7.94 - 14.50
Exercised (74) 7.94 - 7.94
---------------
Outstanding, September 30, 1995 5,502 7.38 - 21.51
Repurchased (917) 2.52 - 3.21
Exercised (1,854) 7.94 - 8.73
---------------
Outstanding, September 30, 1996 2,731 7.38 - 21.51
Canceled (8) 7.38 - 11.80
Exercised (100) 18.00
---------------
Outstanding, December 31, 1996 2,623 7.38 - 21.51
===============
F-47
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(12) Stockholders' Equity (Deficit) (continued)
The warrants outstanding expire on the following dates as of December
31, 1996:
Outstanding Exercise
Expiration date warrants price
-------------------- ---------------------
(in thousands)
June 18, 1998 2 $ 7.38
July 16, 1998 7 7.88
November 10, 1998 2 21.51
December 17, 1998 100 18.00
March 24, 1999 15 20.01
July 8, 1999 1 11.80
July 9, 2000 68 14.50
July 14, 2000 250 7.94
July 14, 2000 250 8.73
August 6, 2005 1,928 12.51
=====================
2,623
=====================
(13) Sale of Teleports
In December 1995, the Company received approximately $21.1 million as
partial payment for the sale of four of its teleports and certain
related assets, and entered into a management agreement with the
purchaser whereby the purchaser assumed control of the teleport
operations. Upon approval of the transaction by the Federal
Communications Commission ("FCC"), the Company completed the sale in
March 1996 and received an additional $0.4 million due to certain
closing adjustments, for total proceeds of $21.5 million. The Company
recognized a loss of approximately $1.1 million on the sale. Revenue
associated with these operations was approximately $5.9 million, $9.1
million and $2.5 million for fiscal years ended September 30, 1994,
1995 and 1996, respectively. The Company has reported results of
operations from these assets through December 31, 1995.
F-48
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(14) Commitments and Contingencies
(a) Network Construction
In November 1995, the Company signed an agreement with City
Public Service of San Antonio ("CPS") to license excess fiber
optic facilities on a new 300-mile fiber network being built by
the municipally-owned electric and gas utility to provide for its
communications needs in the greater metropolitan area. Pursuant
to this agreement, the Company has provided a $12.0 million
irrevocable letter of credit to secure payment of the Company's
portion of the construction costs. The letter of credit is
secured by cash collateral of $13.3 million.
The legal ability of CPS, as a municipally-owned utility, to
enter into this contract with the Company has been challenged by
SBC Communications, Inc. ("SBC") before the San Antonio City
Council as being in violation of a May 1995 Texas state law.
The Company has filed a petition with the FCC requesting a
declaratory ruling that the federal Telecommunications Act of
1996 preempts the Texas state law to the extent that it precludes
implementation of the agreement between CPS and the Company, and
has also filed a declaratory ruling request with a Texas state
court. Both of these actions are pending. The Company has also
filed a civil suit against SBC, and the Company's appeal of a
dismissal of that suit is also pending.
In February 1996, the Company entered into a 20-year agreement
with WorldCom, Inc. ("WorldCom"), under which the Company will
pay approximately $8.8 million for the right to use fiber along a
330-mile fiber optic network in Ohio. The network is being
constructed by WorldCom in conjunction with the Company. An
aggregate of approximately $2.7 million has been paid by the
Company through December 31, 1996, with the balance due upon the
completion of specified segments of the network.
In March 1996, the Company and Southern California Edison Company
("SCE") jointly entered into a 25-year agreement under which the
Company will lease 1,258 miles of fiber optic cable in Southern
California, and can install up to 500 additional miles of fiber
optic cable. This network, which will be maintained and operated
primarily by the Company, stretches from Los Angeles to San
Diego. Under the terms of this agreement, SCE will be entitled to
receive an annual fee for ten years,
F-49
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(14) Commitments and Contingencies (continued)
certain fixed quarterly payments, including a quarterly payment
equal to a percentage of certain network revenue, and certain
other installation and fiber connection fees. The aggregate fixed
payments remaining under this 25-year agreement totaled
approximately $149.4 million at December 31, 1996. The agreement
has been accounted for as a capital lease in the accompanying
consolidated balance sheets at December 31, 1996.
In March 1996, the Company entered into a long-term agreement
with a subsidiary of The Southern Company ("Southern") and
Alabama Power Company ("Alabama Power") for the right to use 22
miles of existing fiber and 122 miles of additional Alabama Power
rights of way and facilities to reach the three major business
centers in Birmingham. Southern will, in conjunction with the
Company, construct the network and provide maintenance services
with respect to the fiber installed. Southern also will provide
consulting services to the Company relating to the build-out of
the network and potential enhancements to the Company's products
and services.
Under the agreement, the Company also is required to pay Southern
a quarterly fee based on specified percentages of the Company's
revenue for services provided through this network. The Company's
estimated costs to complete the network are approximately $4.0
million, which are expected to be incurred during 1997.
In July 1996, the Company entered into a 20-year agreement with
subsidiaries of American Electric Power ("AEP") to jointly build
a 45-mile network addition in metropolitan Columbus, plus a
138-mile long-haul link to Canton, Ohio. The Company's estimated
costs to complete the construction are approximately $4.7
million, which are expected to be incurred during 1997.
(b) Company Headquarters
The Company has acquired property for its new headquarters and
has commenced construction of an office building that the Company
expects will accommodate all of the Company's Colorado
operations. The total cost of the project is expected to be
approximately $44.0 million, of which $9.4 million had been
incurred as of December 31, 1996 and is included in construction
in progress. The Company is currently negotiating financing
arrangements under which the Company will lease
F-50
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(14) Commitments and Contingencies (continued)
the office space under a long-term operating lease, and expects
an agreement to be reached in the near future.
(c) Purchase Commitments
The Company has entered into various equipment purchase
agreements with certain of its vendors. Under these agreements,
if the Company does not meet a minimum purchase level in any
given year, the vendor may discontinue for that year certain
discounts, allowances and incentives otherwise provided to the
Company. In addition, the agreements may be terminated by either
the Company or the vendor upon prior written notice.
In December 1996, the Company entered into an equipment and
software licensing agreement with Northern Telecom, Inc. under
which the Company has agreed to purchase $100.0 million of
telecommunications equipment and software over the next three
years.
In September 1996, the Company entered into a 30-year agreement
and two indefeasible rights of use ("IRU") agreements with the
Los Angeles Department of Water and Power ("LADWP") for 105 miles
of fiber optic capacity throughout downtown Los Angeles, Century
City, West Los Angeles, Mid-Wilshire and Sherman Oaks. The
agreements were subject to acceptance testing and, in January
1997, the Company paid approximately $17.5 million upon the
inception of the agreements. The amount paid was included in
construction in progress and current portion of capital lease
obligations in the accompanying consolidated balance sheets at
December 31, 1996.
In addition to the above, the Company has entered into certain
commitments to purchase assets with an aggregate purchase price
of approximately $34.0 million at December 31, 1996.
F-51
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(14) Commitments and Contingencies (continued)
(d) Leases
The Company leases office space and equipment under
non-cancelable operating leases. Lease expense for the years
ended September 30, 1994, 1995 and 1996, and the three months
ended December 31, 1996, was approximately $1.3 million, $2.8
million, $5.1 million and $1.3 million, respectively. Estimated
future minimum lease payments for the years subsequent to
December 31, 1996 are (in thousands):
Due within:
One year $ 5,592
Two years 4,368
Three years 3,049
Four years 2,112
Five years 1,369
Thereafter 4,721
======================
$ 21,211
======================
(e) Litigation
The Company is a party to certain litigation which has arisen in
the ordinary course of business. In the opinion of management and
legal counsel, the ultimate resolution of these matters will not
have a significant effect on the financial condition of the
Company.
(15) Income Taxes
Income tax expense (benefit) for the year ended September 30, 1996 is
as follows (in thousands):
Year ended
September 30, 1996
--------------------------
Current income tax expense $ 198
Deferred income tax benefit (5,329)
--------------------------
Total $ (5,131)
==========================
F-52
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(15) Income Taxes (continued)
Current income tax expense for the year ended September 30, 1996
represents state income tax relating to operations of companies in
states requiring separate entity tax returns. Accordingly, these
entities' taxable income cannot be offset by the Company's net
operating loss carryforwards. No income tax expense or benefit was
recorded in fiscal 1994, fiscal 1995 or the three months ended December
31, 1996.
Income tax expense (benefit) differs from the amounts computed by
applying the U.S. federal income tax rate to loss before income taxes
primarily because the Company has not recognized the income tax benefit
of certain of its net operating loss carryforwards and other deferred
tax assets due to the uncertainty of realization.
During the year ended September 30, 1996, the deferred tax liability
was adjusted for the effects of certain changes in estimated lives of
property and equipment as discussed in note 2 (f). As a result, the
Company recognized an income tax benefit of $5.3 million.
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
September 30, 1995 and 1996, and December 31, 1996 are as follows:
September 30, December 31,
--------------------- --------------
1995 1996 1996
--------- ----------- --------------
(in thousands)
Deferred income tax
liabilities:
Property and equipment,
due to excess
purchase price of
tangible assets and
differences in depreciation
for book and tax purposes $ 14,935 15,011 14,106
---------- ---------- -------------
Deferred income tax assets:
Net operating loss
carryforwards (37,695) (54,197) (68,740)
Accrued interest on high
yield debt obligations
deductible when paid - (26,800) (32,873)
Accrued expenses not currently
deductible for tax purposes - (4,351) (2,031)
Less valuation allowance 28,462 70,337 89,538
---------- ----------- -------------
Net deferred income tax
asset (9,233) (15,011) (14,106)
----------- ---------- -------------
Net deferred income tax
liability $ 5,702 - -
=========== ========== =============
F-53
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(15) Income Taxes (continued)
As of December 31, 1996, the Company has net operating losses ("NOLs")
of approximately $171.9 million for U.S. tax purposes which expire in
varying amounts through 2011. However, due to the provisions of Section
382, Section 1502 and certain other provisions of the Internal Revenue
Code (the "Code"), the utilization of these NOLs will be limited. The
Company is also subject to certain state income tax laws, which will
also limit the utilization of NOLs.
The net deferred tax asset related to the Company's NOL carryforwards
represents the portion of the NOLs that the Company estimates will be
utilized to reduce future taxable income resulting from the reversal of
temporary differences. A valuation allowance has been provided for the
remainder of the deferred tax asset relating to the NOLs, as management
cannot determine when the Company will generate future taxable income.
(16) Employee Benefit Plans
The Company has established salary reduction savings plans under
Section 401(k) of the Code which the Company administers for
participating employees. All full-time employees are covered under the
plan after meeting minimum service and age requirements. The Company
contributes a matching contribution of its Common Stock (up to 6% of
annual salary) which totaled approximately $0.3 million, $0.5 million,
$1.2 million and $0.5 million during the years ended September 30,
1994, 1995 and 1996, and the three months ended December 31, 1996,
respectively.
(17) Significant Customer
During the year ended September 30, 1995, the Company had revenue from
a single customer which comprised 11% of total revenue and accounts
receivable which comprised 8% of the total accounts receivable balance
at September 30, 1995. There were no customers which accounted for
greater than 10% of revenue or accounts receivable as of, or for the
years ended September 30, 1994 and 1996, or for the three months ended
December 31, 1996.
F-54
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(18) Summarized Financial Information of ICG Holdings, Inc.
As discussed in note 8(a) and (b), the 12 1/2% Notes and 13 1/2% Notes
issued by Holdings during 1996 and 1995, respectively, are guaranteed
by ICG and Holdings-Canada. The separate complete financial statements
of Holdings have not been included herein because such disclosure is
not considered to be material to the holders of the 12 1/2% Notes and
13 1/2% Notes. However, summarized combined financial information for
Holdings and subsidiaries and affiliates as of September 30, 1995 and
1996, and December 31, 1996 and for the years ended September 30, 1994,
1995 and 1996, and for the three months ended December 31, 1996 is as
follows:
Summarized Consolidated Balance Sheet Information
September 30, December 31,
------------------------------------------
1995 1996 1996
---------- --------- ---------------
(in thousands)
Current assets $ 309,208 506,150 449,059
Property and equipment, net 201,983 336,137 403,932
Other non-current assets, net 66,737 94,046 88,183
Current liabilities 60,036 59,963 87,423
Long-term debt, less
current portion 304,666 668,498 690,293
Due to parent 238,282 8,595 11,485
Other long-term liabilities 37,214 76,469 73,113
Preferred stock 14,986 153,318 159,120
Stockholders' deficit (77,256) (30,510) (80,260)
Summarized Consolidated and Combined Statement of Operations
Information (a)
Years ended September 30, Three months ended
-------------------------- December 31,
1994 1995 1996 1996
-------- ------- ---------- ------------------
(in thousands)
Total revenue $ 58,995 111,610 169,094 56,956
Total operating
costs and expenses 72,509 157,384 238,908 83,934
Operating loss (13,514) (45,774) (69,814) (26,978)
Net loss (15,194) (68,760) (172,687) (49,750)
F-55
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(18) Summarized Financial Information of ICG Holdings, Inc. (continued)
(a) The 1994 amounts include FOTI and its subsidiaries
which was 51% owned by Holdings-Canada.
Holdings-Canada's 51% interest in FOTI was
contributed to Holdings effective in February 1995
(the remaining 49% was purchased in January 1996)
and, accordingly, FOTI's operations have been
included in the consolidated amounts subsequent to
that date.
(19) Condensed Financial Information of ICG Holdings (Canada), Inc.
Condensed financial information for Holdings-Canada only as of
September 30, 1995 and 1996, and December 31, 1996 and for the years
ended September 30, 1994, 1995 and 1996 and for three months ended
December 31, 1996 is as follows:
Condensed Balance Sheet Information
September 30, December 31,
-------------------- -------------------
1995 1996 1996
----------- -------- -------------------
(in thousands)
Current assets $ 249 177 165
Advances to subsidiaries 238,282 8,595 11,485
Property and equipment, net 21 - -
Other non-current assets, net 5,355 2,841 2,793
Current liabilities 332 200 199
Long-term debt, less current
portion 74,434 491 65
Due to parent - 453 1,566
Share of losses of subsidiary 77,256 30,510 80,260
Shareholders' equity (deficit) 91,885 (20,041) (67,647)
Condensed Statement of Operations Information
Three
Years ended September 30, months ended
---------------------------- December 31,
1994 1995 1996 1996
----------- -------- ------- ---------------
(in thousands)
Total revenue $ - - - -
Total operating costs
and expenses 1,024 1,309 3,438 73
Operating loss (1,024) (1,309) (3,438 (73)
Losses from subsidiaries (15,194) (68,760) (172,687) (49,750)
Net loss attributable to
common shareholders (23,868) (76,648) (184,107) (49,823)
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(20) Condensed Financial Information of ICG Communications, Inc.
(Parent company)
The sole asset of ICG is its investment in Holdings-Canada. ICG has no
operations other than those of Holdings-Canada and its subsidiaries.
F-57
FINANCIAL STATEMENT SCHEDULE
Page
ICG Communications, Inc. -----
Independent Auditors' Report S-2
Schedule II: Valuation and Qualifying Accounts S-3
S-1
Independent Auditors' Report
The Board of Directors and Stockholders
ICG Communications, Inc.:
Under the date of February 21, 1997, we reported on the consolidated balance
sheets of ICG Communications, Inc. and subsidiaries as of September 30, 1995 and
1996, and December 31, 1996 and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for each of the years
in the three-year period ended September 30, 1996, and the three-month period
ended December 31, 1996 as contained in the Company's Transition Report on Form
10-K for the transition period from October 1, 1996 to December 31, 1996. In
connection with our audits of the aforementioned consolidated financial
statements, we have also audited the related financial statement schedule as
listed in the accompanying index. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as whole, presents
fairly, in all material respects, the information set forth therein.
As explained in note 2 to the consolidated financial statements, during the year
ended September 30, 1996, the Company changed its method of accounting for
long-term telecom services contracts.
KPMG Peat Marwick LLP
Denver, Colorado
February 21, 1997
S-2
Schedule II
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Valuation and Qualifying Accounts
- -------------------------------------------------------------------------------
(in thousands)
Balance at Charged to Balance at
Beginning Costs and Deductions/ End of
of Period Expenses Writeoffs Period
---------- ------------ ----------- ----------
Allowance for uncollectible
trade receivables:
Year ended September 30, 1994 $ 111 1,791 (841) 1,061
-------- ---------- ------------ ----------
Year ended September 30, 1995 $ 1,061 2,360 (1,204) 2,217
-------- ---------- ----------- ---------
Year ended September 30, 1996 $ 2,217 1,585 (1,293) 2,509
-------- ---------- ----------- ---------
Three months ended December
31, 1996 $ 2,509 914 (908) 2,515
-------- ----------- ----------- ---------
Allowance for uncollectible
note receivable:
Year ended September 30, 1994 $ - - - -
-------- ------------ ----------- ----------
Year ended September 30, 1995 $ - 175 - 175
-------- ------------ ----------- ----------
Year ended September 30, 1996 $ 175 7,100 - 7,275
-------- ------------ ----------- ----------
Three months ended December
31, 1996 $ 7,275 - - 7,275
-------- ------------ ----------- ----------
Allowance for investment
impairment:
Year ended September 30, 1994 $ - - - -
-------- ------------- ---------- ----------
Year ended September 30, 1995 $ - 2,000 - 2,000
-------- -------------- ---------- ----------
Year ended September 30, 1996 $ 2,000 - - 2,000
-------- -------------- ---------- ----------
Three months ended December
31, 1996 $ 2,000 - - 2,000
--------- -------------- ---------- ----------
See accompanying independent auditors' report.
S-3
INDEX TO EXHIBITS
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
TRANSITION REPORT ON FORM 10-K for the
transition period from October 1, 1996 to December 31, 1996
Filed Pursuant to Section 13 of the Securities Exchange Act of 1934
EXHIBITS
10.44: Consulting Services Agreement, by and between IntelCom Group Inc.
and International Communications Consulting, Inc., effective
January 1, 1996.
10.45: Confidential General Release and Covenant Not to Sue,
by and between ICG Communications, Inc. and John D. Field,
dated November 5, 1996.
21: Subsidiaries of the Registrant.
23.1: Consent of KPMG Peat Marwick LLP.
27: Financial Data Schedule.
EXHIBIT 10.44
Consulting Services Agreement, by and between IntelCom Group Inc. and
International Communications Consulting, Inc., effective January 1, 1996.
EXHIBIT 10.45
Confidential General Release and Covenant Not to Sue, by and
between ICG Communications, Inc. and John D. Field, dated November 5, 1996.
EXHIBIT 21
Subsidiaries of the Registrant
EXHIBIT 23.1
Consent of KPMG Peat Marwick LLP
EXHIBIT 27
Financial Data Schedule
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, on February 19, 1997.
ICG Communications, Inc.
By: /s/J. Shelby Bryan
J. Shelby Bryan
President, Chief Executive Officer
and Director
Pusuant to the requirements of the Securities Act of 1934, this Report has been
signed by the following persons in the capacities and on the dates indicated:
Signature Title Date
Chairman of the Board of
/s/William J. Laggett Directors February 19, 1997
- ------------------------
William J. Laggett
President, Chief Executive
Officer and Director (Principal
/s/J. Shelby Bryan Executive Officer) February 19, 1997
- -------------------------
J. Shelby Bryan
Executive Vice President, Chief
Financial Officer and Treasurer
/s/James D. Grenfell (Principal Financial Officer) February 19, 1997
- -------------------------
James D. Grenfell
Vice President and Corporate
Controller (Principal Accounting
/s/Richard Bambach Officer) February 19, 1997
- -------------------------
Richard Bambach
/s/Harry R. Herbst Director February 19, 1997
- -------------------------
Harry R. Herbst
/s/Stan McLelland Director February 19, 1997
- -------------------------
Stan McLelland
/s/Jay E. Ricks Director February 19, 1997
- -------------------------
Jay E. Ricks
/s/Leontis Teryazos Director February 19, 1997
- --------------------------
Leontis Teryazos
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, on February 19, 1997.
ICG Holdings (Canada), Inc.
By: /s/J. Shelby Bryan
J. Shelby Bryan
President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Act of 1934, this Report has been
signed by the following persons in the capacities and on the dates indicated:
Signature Title Date
Chairman of the Board of
/s/William J. Laggett Directors February 19, 1997
- -----------------------
William J. Laggett
President, Chief Executive Officer
and Director (Principal Executive
/s/J. Shelby Bryan Officer) February 19, 1997
- ------------------------
J. Shelby Bryan
Executive Vice President, Chief
Financial Officer and Treasurer
/s/James D. Grenfell (Principal Financial Officer) February 19, 1997
- ------------------------
James D. Grenfell
Vice President and Corporate
Controller (Principal Accounting
/s/Richard Bambach Officer) February 19, 1997
- ------------------------
Richard Bambach
/s/Harry R. Herbst Director February 19, 1997
- ------------------------
Harry R. Herbst
/s/Jay E. Ricks Director February 19, 1997
- ------------------------
Jay E. Ricks
/s/Gregory C.K. Smith Director February 19, 1997
- ------------------------
Gregory C.K. Smith
/s/Leontis Teryazos Director February 19, 1997
- ------------------------
Leontis Teryazos
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, on February 19, 1997.
ICG Holdings, Inc.
By: /s/J. Shelby Bryan
J.Shelby Bryan
Chairman of the Board of
Directors, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this Report has been
signed by the following persons in the capacities and on the dates indicated:
Signature Title Date
Chairman of the Board of
Directors, President and Chief
/s/J. Shelby Bryan Executive Officer (Principal
- ---------------------- Executive Officer) February 19, 1997
J. Shelby Bryan
Executive Vice President, Chief
/s/James D. Grenfell Financial Officer, Treasurer and
- ----------------------- Director (Principal Financial Officer) February 19, 1997
James D. Grenfell
Vice President and Corporate
/s/Richard Bambach Controller (Principal Accounting
- ----------------------- Officer) February 19, 1997
Richard Bambach
/s/William J. Maxwell Executive Vice President-Telecom
- ----------------------- and Director February 19, 1997
William J. Maxwell
/s/Mark S. Helwege Executive Vice President-Network
- ----------------------- and Director February 19, 1997
Mark S. Helwege